UNIVERSITY OF KWAZULU-NATAL PERCEPTIONS OF THE …
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UNIVERSITY OF KWAZULU-NATAL PERCEPTIONS OF THE NATIONAL CREDIT ACT: A CASE STUDY OF WOOLWORTHS HILLCREST By PHOLA NGUBANE 201501495 A dissertation submitted in partial fulfillment of the requirements for the degree of Master of Business Administration Graduate School of Business and Leadership Supervisor: Ms Cecile Gerwel 2014
Transcript of UNIVERSITY OF KWAZULU-NATAL PERCEPTIONS OF THE …
UNIVERSITY OF KWAZULU-NATAL
PERCEPTIONS OF THE NATIONAL CREDIT ACT: A CASE STUDY OF
WOOLWORTHS HILLCREST
By
PHOLA NGUBANE 201501495
A dissertation submitted in partial fulfillment of the requirements for the degree
of Master of Business Administration
Graduate School of Business and Leadership
Supervisor: Ms Cecile Gerwel 2014
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Declaration
I, Phola Ngubane, declare that:
(i) The research reported in this dissertation, except where otherwise indicated, is my
original research.
(ii) This dissertation has not been submitted for any degree or examination at any other
university.
(iii) This dissertation does not contain other persons‟ data, pictures, graphs or other
information, unless specifically acknowledged as being sourced from other persons.
(iv) This dissertation does not contain other persons‟ writing, unless specifically
acknowledged as being sourced from other researchers. Where other written sources
have been quoted, then,
a) their words have been re-written, but the general information attributed to
them has been referenced; and
b) where their exact words have been used, their writing has been placed inside
quotation marks, and referenced.
(v) This dissertation does not contain text, graphics or tables copied and pasted from the
Internet, unless specifically acknowledged, and the source being detailed in the
dissertation and in the references sections.
Signature:
______________________________
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Acknowledgements
I would first like to thank my Lord and Saviour, Jesus Christ, for helping and guiding me
during the tough times and showing me that nothing is impossible once you set your mind to
it.
I wish to express my sincere appreciation to the following individuals who guided me to the
end of this study:
My supervisor, Cecile Gerwel, who did not cease to encourage and support me when
I lost hope in what seemed to be a never-ending journey.
My family: mother, father, and three brothers, for their continuous support and
encouragement throughout this research.
My fiancé, Eddie Nyanzi, and my babies, Nandi and Milan Nyanzi, for their patience
and understanding.
All the interview respondents who assisted me tremendously with my dissertation.
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Abstract
The National Credit Act (NCA) was enacted to replace the previous credit regulations that
failed to address the needs of the consumer credit market. The credit market in South Africa
was in disarray due the country being divided into two; the richer whites and the poorer
blacks. The study seeks to establish how the NCA is viewed by consumers. The study
considers whether the NCA is viewed as beneficial by consumers and credit providers,
whether there is sufficient protection for consumers and whether consumers have an
understanding of the NCA. The research methodology used was the qualitative research
approach as it allows respondents to share their attitudes and experiences on the topic.
Purposive sampling was utilized because respondents with knowledge on the topic were
interviewed. The data collection was that of primary data in the form of semi-structured
interviews because it affords respondents a great deal of flexibility in their responses as they
are not confined to the questions and are encouraged to provide extra information they may
have. Eight in-depth, face-to-face interviews were conducted. Some salient findings of the
study indicated that the NCA provides consumers with protection by introducing procedures
that must be followed by credit providers prior to granting credit. These procedures assess
whether consumers are able to afford to repay their debt by considering their income,
expenses and credit history. There appeared to be some division as to whether or not
consumers understand the purpose to the NCA. The NCA was also viewed as beneficial due
to all the sections that afforded consumers protection from the uneven bargaining power of
credit providers. The main recommendations of the study were that a greater need for
awareness or training of staff is required to spread knowledge and information, intervention
programmes and responsible advertising.
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Language Editor
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Supervisors Permission to Submit
University of KwaZulu-Natal
College of Law and Management Studies
Name: Phola Ngubane No: 201501495
Title: Perceptions of the National Credit Act: A case study of Woolworths Hillcrest
Qualification: Master of Business
Administration
School: Graduate School of Business and
Leadership
Yes No
To the best of my knowledge, the thesis/dissertation is
primarily the student‟s own work and the student has
acknowledged all reference sources
The English language is of a suitable standard for
examination without going for professional editing.
Turnitin Report %
Comment if % is over 10%:
I agree to the submission of this dissertation for
examination
Supervisors Name: Cecile Gerwel Proches
Supervisors Signature:
Date:
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Table of Contents
Declaration ................................................................................................................................ ii
Acknowledgements .................................................................................................................. iii
Abstract .................................................................................................................................... iv
Language Editor………………………………………………………………………………………..v
Supervisors Permission to Submit…………………………………………………………………...vi
List of Figures ........................................................................................................................... xi
List of Tables ........................................................................................................................... xii
CHAPTER ONE ....................................................................................................................... 1
1.1. Introduction .................................................................................................................... 1
1.1.1. Background and Context ......................................................................................... 2
1.1.2. An Overview of the National Credit Act ................................................................... 3
1.1.3. Woolworths History.……………………………………………………………………….5
1.2. The extent of the Indebtedness of South Africa ............................................................. 7
1.3. Focus of the study ......................................................................................................... 7
1.4. Problem statement ......................................................................................................... 8
1.5. Aim and objectives ......................................................................................................... 9
1.6. Research Methodology ................................................................................................ 10
1.6.1. Sampling and Sampling Size ................................................................................ 10
1.6.2. Data Collection and Data Analysis ........................................................................ 11
1.7. Limitations of the Study ............................................................................................... 11
1.8. Overview of the Study .................................................................................................. 12
1.9. Conclusion…………………………………………………………………………………… 12
CHAPTER TWO – LITERATURE REVIEW ........................................................................... 14
2.1. Introduction .................................................................................................................. 14
2.2. Definition of Consumer ................................................................................................ 14
2.3. Credit Defined .............................................................................................................. 15
2.4. South Africa‟s Economy ............................................................................................... 16
2.5. The Impact on Poor Communities ............................................................................... 16
2.6. Rise in Consumer Debt ................................................................................................ 17
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2.7. The Evolution of the National Credit Act: Historical Overview ..................................... 20
2.8. The Role of Credit in an Economy ............................................................................... 24
2.9. Factors That Affect Consumer Behaviour .................................................................... 24
2.10. What Is the NCA? ...................................................................................................... 25
2.11. Purpose of NCA ......................................................................................................... 25
2.12. Implementation of the NCA ........................................................................................ 28
2.13. The Guideline for the Cost of Credit within the Microfinance Industry ....................... 28
2.14. Consumer Protection of Consumer Credit ................................................................. 30
2.15. Disclosure Policies ..................................................................................................... 30
2.16. The Credit Market – Credit Usage, Supply and Demand ........................................... 29
2.16.1. Introduction ......................................................................................................... 29
2.16.2. Size of the Current Credit Market ........................................................................ 29
2.17. Impact of the NCA on Access .................................................................................... 30
2.18. Different Countries‟ Regulatory Regimes ................................................................... 31
2.18.1. Introduction ......................................................................................................... 31
2.18.2. Nigeria ................................................................................................................. 33
2.18.3. Ghana ................................................................................................................. 31
2.18.4. Indonesia ............................................................................................................. 32
2.19. Consumers‟ Perception Regarding Credit Providers and Their Products .................. 32
2.20. Consumer Attitudes About the NCA .......................................................................... 33
2.21. NCA‟s Impact on the Prevention of Unfair Credit Practices ....................................... 35
2.22. Challenges of the NCA .............................................................................................. 36
2.23. Conclusion ................................................................................................................. 38
CHAPTER THREE – RESEARCH METHODOLOGY ............................................................ 39
3.1. Introduction .................................................................................................................. 39
3.2. Qualitative and Quantitative Research ........................................................................ 39
3.3. Research Philosophy and Approach ……………………………………………………… 38
3.4. Research Design and Methods .................................................................................... 39
3.4.1. Sampling and Sample Size ................................................................................... 39
3.4.2. Data Collection ...................................................................................................... 43
3.4.3. Semi-Structured Interviews ................................................................................... 41
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3.4.4. Feedback on Interviews ....................................................................................... .42
3.4.5. Research Instrument Design……………………………………………………………43
3.5. Construction of the Instrument: The Interview Question .............................................. 43
3.6. Data Analysis ............................................................................................................... 44
3.6.1. Validity and Reliability…………………………………………………………………...45
3.6.2. Preparation and Readiness for the Interviews………....……………………………..46
3.6.3. Approach to Questioning………………………………………………………………..46
3.6.4. Cultural Differences and Bias……………………………………………………….…..47
3.7. Research Limitations ................................................................................................... 50
3.8. Conclusion ................................................................................................................... 51
CHAPTER FOUR – RESULTS AND DISCUSSION ............................................................... 52
4.1. Introduction .................................................................................................................. 52
4.2. Theme 1 ...................................................................................................................... 52
4.2.1. Consumer Understanding ..................................................................................... 52
4.2.2. Consumer Awareness and Knowledge ................................................................. 50
4.2.3. Consumer History ................................................................................................. 55
4.2.4. Factors Affecting Credit Being Granted ................................................................. 56
4.2.5. Historical Factors Influencing Credit Industry ........................................................ 57
4.2.6. Cycle of Poverty .................................................................................................... 59
4.2.7. Effects of Credit Attitude on Consumers ............................................................... 60
4.3. Theme 2 ...................................................................................................................... 61
4.3.1. Consumer Protection ............................................................................................ 61
4.3.2. The Impact of NCA on Consumer Indebtedness ................................................... 63
4.3.3. Measures in the NCA That Will Impact on Consumers Spending and Consumer
Debt Burden .................................................................................................................... 61
4.3.4. Credit Marketing and Advertising .......................................................................... 65
4.3.5. Pre-Agreement Disclosure .................................................................................... 66
4.4. Theme 3 ...................................................................................................................... 67
4.4.1. Expenses for Lower-Income Earners .................................................................... 67
4.4.2. Over-Indebtedness…………………………………………………………………… ..66
4.5. Theme 4 ...................................................................................................................... 69
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4.5.1. Bias against Race to Allocate Credit ..................................................................... 69
4.6. Conclusion ................................................................................................................... 70
CHAPTER FIVE – CONCLUSION AND RECOMMENDATIONS ........................................... 69
5.1. Introduction .................................................................................................................. 69
5.2. Research Questions .................................................................................................... 74
5.3. Key Findings ................................................................................................................ 74
5.3.1. Whether Consumers Understand the Purpose/Benefit of the NCA ....................... 72
5.3.2. Whether Consumers Understand the Purpose of the NCA…………………….. ….75
5.3.3. Whether Credit Providers View the NCA as Beneficial ......................................... 76
5.3.4. Whether the NCA Effectively Prevents Unfair Credit Practices ............................. 78
5.4. Recommendations ...................................................................................................... .79
5.4.1. Awareness or training of staff to explain the NCA……………………….……….…..79
5.4.2. Suggested amendments to Regulations……………………………………………....80
5.4.3. Intervention Programmes…………………………………………………………….….81
5.4.4. Proper or responsible advertising …………………………………………………......81
5.4.5. Transparency about credit approval…………………………………………………….. .. .82
5.5. Recommendations for Further Research ..................................................................... 84
5.6. Conclusion ................................................................................................................... 83
References ............................................................................................................................. 87
Appendix 1: Interview Questions ............................................................................................ 98
Appendix 2: Informed Consent Form...................................................................................... 99
Appendix 3: Ethical Clearance Approval .............................................................................. 102
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List of Figures
Figure 1.1 Percentage of sales on Woolworths cards…………………………………………..7
Figure 2.1 Table depicting demographic groups without bank accounts ……………………16
Figure 2.2 Total Micro lending loan book as at the end of each quarter……………………..27
Figure 2.3 Size of credit market ………………………………………………………………….29
Figure 2.4 Repayment experience – credit standing of consumers…………………………..30
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List of Tables
Table 3.1 Details of respondents………………………………………………………………….40
Table 4.1 Literacy and basic education aged 15 and over…………………………………….49
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List of Acronyms and Abbreviations
APR Annual Percentage Rate
ASGISA Accelerated and Shared Growth – South Africa
CCA Consumer Credit Account
CFA Consumer Federation of America
CPA Consumer Protection Act
DTI The Department of Trade and Industry
ICRO Investigation and Consumer Reporting Office
LSM Living Standard Measure
GDP Gross Domestic Product
MFI Microfinance Institutions
MFRC Microfinance Regulatory Commission
NCA The National Credit Act
NCPA National Consumer Protection Agency
NCR The National Credit Regulator
NCT The National Consumer Tribunal
NDMA National Debt Mediation Association
NLR National Loan Register
NGO Non-governmental Organization
SARB South African Reserve Bank
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CHAPTER ONE – INTRODUCTION
1.1. Introduction
South Africa has made a great deal of progress with regard to economic growth since
1994.The country still feels the ripple effects of the previous apartheid regime. The
Accelerated and Shared Growth Initiative (ASGISA) – South Africa (ASGISA, 2006)
refers to two economies. The first economy is categorized as being modern, wealthier
and developed – being similar to a first-world country. The National Credit Regulator
(NCR)(NCR,2007) in its Annual Report also makes reference to the first economy as
having a functional credit system. The second economy is undeveloped and poverty-
stricken. In it, there are underprivileged people who lack adequate skills and
education that would equip them to obtain jobs. As a result of parents being poor, the
older siblings educate and look after the younger siblings. This has the effect of
creating a burden on the children and makes it harder to break the poverty cycle.
It is the Department of Trade and Industry (the dti) that is at the custodian of
protection of consumer rights and credit policy. The aim is to regulate credit, educate
consumers, and provide consumers with protection from the unequal power of credit
providers.
This study is aimed at identifying and understanding perceptions of the NCA. The
study will be beneficial to consumers, credit providers, credit regulators and the
drafters of NCA. The study will consider the views of those who are affected by NCA,
their understanding, and its implementation.
This chapter will focus on the background and context, objectives, research
methodology, and limitations of this study.
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1.1.1. Background and Context
Many South Africans, as a result of the imbalances created by apartheid laws, were
left economically crippled. As a consequence, many people were unable to afford to
acquire assets by paying cash, and they would turn to using credit to acquire assets.
The Usury Act of 1968 was the predecessor of the NCA; it was implemented during
apartheid and, as a result, it was flawed because it excluded non-white citizens. The
implementation of the Usury Act Exemption meant that interest was not regulated on
small loans, which lead to a boom in the lending industry. The effects of this policy
were felt by the urban, employed people whilst poor, rural South Africans were
excluded. The consequence to the industry was an exclusion from the banking sector
of lower-income earners (Meager, 2005).
The South African Reserve Bank (SARB) and the NCR state that consumer spending
is still high despite the effects of recession (Kelly-Louw, 2008). It is this consumer
spending that has left consumers over-indebted and seeking assistance of debt
review (Coetzee & Roestoff, 2012). According to Steyn (2012) in 2011 retail sales,
demand for credit and spending of consumers increased with rates of rentals in
residential areas and taxes.
A legislation reform was necessary in consumer credit law due to the lack of
effectiveness of the former consumer credit legislation in addressing the needs of the
consumer credit market, complex as it may be (Business Day, 2006). The previous
United Nations Secretary General, Mr. Kofi Annan, stated regarding the ability to
obtain credit that it “helps alleviate poverty by generating income, creating jobs,
allowing children to go to school, enabling families to obtain health care and
empowering people to make choices that best serve their needs” (Lee, 2006, p.524).
The NCA seeks to enforce the principles enshrined in the Constitution by giving
consumers access to a fair credit system that seeks to empower black South Africans
within the credit industry (NCA, 34 of 2005).
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NCA replaced the Usury Act when it was brought into law by the South African
President in March 1996. The NCA seeks to provide a measure of protection to the
consumer because it considers the consumers‟ personal income and expenditure and
their ability to repay a debt. The purpose of NCA was to bring about one system that
would regulate credit. The NCA would also try to increase within the credit industry,
black economic ownership and empowerment. Consumers are provided with
protection from unfair credit practices and to make reckless credit borrowing illegal
(National Credit Act 34, 2005).
1.1.2 An Overview of the NCA The South African credit market was flawed because it was made up of different
pieces of legislation that were tasked with regulating certain aspects of credit. This
was to result in abusive practices and high interest rates charged to low-income
earners. These low-income earners (most of whom constitute the uneducated section
of consumers) were only able to access micro-loans that were charged at high prices
for credit. The effect on these uneducated consumers was that they were unable to
repay their debt. The NCA sought to merge all of the Acts that were applicable to
consumers and credit, namely:
a) The Credit Agreements Act of 1980.
b) The Usury Act of 1968.
c) The Usury Exemptions Act of 1999.
The NCA can be summed up as focusing on a consumer‟s ability to repay debt,
disclosure of the cost of credit and interest rate caps. The NCA is applicable to credit
agreements between parties. A credit agreement can be defined as:
a) a credit transaction – installment credit, mortgage agreement or any other
agreement;
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b) a credit provider undertakes to furnish goods or services or make a payment of
an amount to a consumer; and
c) a credit guarantee – a promise to fulfill a demand or an obligation of another
consumer in terms of a credit facility or transaction combination of the above
(NCA, 2005:32).
The NCA places the burden of accessing creditworthiness of the consumer on the
credit provider. The NCA also places the onus on the credit provider to be vigilant, or
else, the credit agreement can be rendered null and void. The consumer is also
afforded certain rights such as the right to seek credit and transparency as to why
credit is being declined. Consumers are given protection from a credit limit that is
automatically increased. Should there be a dispute between the credit provider and
consumer, the judge is given the discretion to delete the outstanding debt, should it
be discovered that the credit provider engaged in reckless lending, which is prohibited
by NCA (NCA, 2005).
The NCA resulted in the formation of the National Credit Regulator (NCR) and the
National Consumer Tribunal (NCT), which were tasked with implementing the
provisions of the NCA. The NCR which operates independently was established in
terms of the NCA, and it operates in terms of the Public Finance Management Act 29
of 1999. It was established on 1 June 2006. The main functions are:
a) to create education and awareness of the NCA to its consumers;
b) regulation of credit bureau, credit provider and debt counselor;
c) advise government on legislation and policy; and
d) conduct research on the credit market and consistently oversee the cost of
credit, any restrictions that may have a consequence on credit markets, and
enforce the NCA and the sanctions imposed on those who are in contravention
of NCA (NCA, 2005).
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The NCR can be one of the vehicles used to obtain relief regarding consumer affairs
along with the Ombudsman, whether it is a complaint linked with the credit
information or banks, or any other complaint. There is also the Provincial Consumer
Desks that attend to consumers‟ complaints.
The NCT also operates independently and is tasked with the adjudication of matters
where there are practices or conduct that is prohibited. Fines can be issued, and this
provides a forum for consumers to be heard. The NCT also acts as a forum of appeal
for credit providers and consumers from any decisions that are made by the NCR.
1.1.3. Woolworths History
Woolworths is a retail chain store that opened in Cape Town in October 1931. The
founder, Max Sonnenberg, opened the dynamic store with a policy that differentiated
it from its competitors. A second branch was opened in Durban, and two more
branches were opened in Port Elizabeth and Johannesburg, which symbolised the
success of the brand (Woolworths, 2011).
The number of stores has grown rapidly to more than 400 branches in South Africa,
Africa and the Middle East. Woolworths has always placed consumers and their
needs at the centre. The company also aimed at being ahead of the pack by
understanding and embracing technology; they were utilizing cash registers in the
1960s (Woolworths, 2011).
Woolworths continued to be pioneers in their product offering; in 1974, it was
Woolworths that introduced the notion of “sell by” dates on food labels. Woolworths
also prides itself in offering convenience to consumers (Woolworths, 2011).
To facilitate growth within Woolworths, one of the giant leaps taken by retailers was to
introduce financial products.
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The services are:
a) the card: the product gives consumers access to credit when
purchasing any Woolworths merchandise;
b) the cash card: the card allows cash customers to be eligible for
discounts when they use the card;
c) the credit card: a credit facility is given to the consumer, according to
their affordability;
d) personal loans: customers are given access to short-term personal
loan; and
e) insurance: there is a variety of insurance products being offered,
including car, home, cellphone and travel insurance
(www.woolworths.co.za/store/fragments/wfs/wfs-index.jsp).
According to Steyn (2013) retailers are experiencing strain as a result of economic
times that are relatively uncertain. Retailers rely on consumer spending, which is 60%
responsible for economic growth. A research study by Deloitte (2012) that was
commissioned by the NCR depicts clothing accounts as the most frequently used
type of credit, followed by personal loans, furniture and credit cards.
According to Woolworths Annual Report (2008), there was a decline in the growth of
new accounts that was as a result of the impact of the NCA introducing more
stringent control measures and a decrease in credit use due to interest rates being
high. There was an increase in bad debts within the first six months of the year but by
year end, the position had stabilized. The same year, Woolworths card revenue was
low with less customers and card usage decreased with 27.2% of retail sales coming
from the card. The introduction of the NCA had an impact on retail stores such as
Woolworths and this study seeks to take a closer look at the impact. The figure below
depicts the decline in credit of Woolworths cards.
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The figure below depicts the percentage of sales that can be attributed to clothing and
general merchandise in relation to food.
Figure 1: Percentage of sales on Woolworths cards
Source: Woolworths Holdings (2008)
Figure 1 indicates that from 2007 till 2008 there has been a decline in sales from
32.2% to 27.2%. A factor that contributed to the decline in sales was the introduction
of the NCA because there measures introduced to access whether consumers could
afford credit based on affordability
1.2. The extent of the Indebtedness of South Africans
According to the SA Reserve Bank Quarterly Bulletin (2007), household debt levels
were at 76.6%inthe second quarter of 2007. The rise in credit could also be attributed
to financial deregulation, increase in household wealth and decreasing interest rates.
The SA Reserve Bank Quarterly Bulletin (2007) confirms that consumer spending has
increased, and it attributes it to a rise in disposable income.
1.3. Focus of the Study
The study will be based on credit providers of Woolworths Hillcrest and their
interaction with the NCA.As already mentioned, Woolworths is a company founded in
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1931 by Max Sonnenberg. He believed in giving customers superior quality
merchandise at reasonable prices. Woolworths Hillcrest sells clothing for men,
women and children. It also has a homeware and food section. Their customers are
people who are willing to spend a little bit extra for quality products. Woolworths sells
their products using cash and credit. They have also created a personal loan facility.
The retail credit industry and the credit industry in general are problematic. The Rural
Development Framework (1997) differentiates between the targeted groups of rural
women, children, farm workers, small farmers and disabled groups that require
support. This was argued as inadequate policy differentiation. The Strauss
Commission (1996b) identifies subgroups in rural areas making emphasis income
source and/or gender as an important differentiator. The various groups require
specific types of financial services.
The current attempts to supply retail funds to South Africans, depicts a negative
picture about the prospects of increased access to rural financial services. Supply of
financial services including retail credit has been neglected in rural areas when
compared with urban areas. There is a system of decentralized financial services,
which is focused on saving, e.g. stokvels and as a result, great deal of limitations
regarding access to credit (Graham & Von Pischke,1995). Woolworths is focused on
quality products that customers are willing to pay a little more for but they have shifted
their focus to more affordable quality products to accommodate a wider range of
customers.
The study is aimed at providing both the consumer and the credit provider (within
retail) with knowledge and insight into the NCA. This study tries to highlight where the
problem areas are and what needs to be considered when credit is granted, in order
to help credit providers be more responsible. The onus is on credit providers to
comply with the NCA by ensuring that a person‟s credit history and finances are
checked before credit is granted (NCA, 2005).
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1.4. Problem Statement
There are many people in South Africa who seek credit, whether it is to purchase a
home, a car, furniture, or just to access cash on credit. Many people who seek access
to credit are not aware of the financial implications of the credit agreements they
engage in. People are also seeking credit which they may not be able to repay in the
future. The NCA was implemented with the intention of addressing these issues (Lee,
2006).
According to Moorad (2013), high unemployment in South Africa and income growth
that is slow, have caused a decline in household spending due to increasing utility
costs and rising debt. Unsecured lending has decreased which is a contributing factor
that leads to consumers finding it difficult to repay loans and settle their accounts. The
Johannesburg Stock Exchange (JSE) general retailer‟s index decreased 3.7% in
2013. Credit plays a role in the economy and as a result it is important to consider
how it is perceived.
The question that this study seeks to address is whether the NCA is viewed as
beneficial, protective, and as a tool for consumer to protect themselves from the
uneven power of credit providers.
1.5. Aim and Objectives
This study is focused on the perceptions of credit providers of the NCA from the angle
of a provider of credit and the consumers they interact with daily. It places a focus on
whether the NCA is viewed as benefiting the consumer by acting as a measure of
information and protection. The focus is on whether credit providers understand who
the NCA is trying to protect and whether the NCA provides sufficient protection or
whether this piece of legislation failed to provide protection to consumers.
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The aim of this study was to gain a greater understanding of how the NCA is viewed
by the people who are affected by it.
There are four objectives in the study:
a) To determine whether consumers view the NCA as beneficial.
b) To establish whether consumers understand the purpose of the NCA.
c) To determine whether credit providers view the NCA as beneficial.
d) To determine whether the NCA effectively prevents unfair credit
practices.
1.6. Research Methodology
This study employed the qualitative research approach. Qualitative research, which is
based on descriptions and the way a person interprets a situation, allows the
respondent to voice any personal experiences and examples in order to add
“richness” to the content of the data. Qualitative research lays the ground for an open
system because it encourages the respondent to speak openly on a topic (Dunn,
2010).
Secondary data was collected from journals, books and the Internet. The history of
the NCA is identified, and its impact on the consumers it seeks to protect is identified
in the literature. It is this impact on consumers and credit providers that formed part of
the framework for the analysis.
1.6.1. Sampling and Sampling Size
Purposive sampling was used to obtain information from targeted groups according to
their ability to be available. The information was limited to the people who were able
to provide it. The study focused on respondents who have a good knowledge of the
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NCA, whether it is persons who have practical dealings with the NCA or persons who
were responsible for drafting the NCA.
1.6.2. Data Collection and Data Analysis
The study combined primary and secondary sources. According to Sekaran and
Bougie (2010), primary data is collected by the researcher, and secondary data is
gathered from existing sources. Primary data can be collected from numerous
methods, such as interviews. The study made use of semi-structured interviews.
Semi-structured interviews are best suited for this research because they provide a
great deal of flexibility to the respondents, who are encouraged to provide extra
information that can add another dimension to the study. Questions can also be
added to the interview, and the responses are noted by taking down notes or through
tape recording (Gray, 2004).
Extensive research of the literature was first conducted, followed by
semi-structured, in-depth interviews which were conducted with eight respondents. A
tape recorder was used, when possible, or the interviews were recorded by means of
writing notes. Data analysis was then conducted using Hermeneutical Analysis, which
is not finding the objective meaning but rather telling people a story using their words,
which can also assist to condense and evaluate the data (Van Manen, 1990).
Data analysis is the inferences that can be made from the data collected. According
to Miles and Huberman (1994), data analysis is made up three steps: data reducing,
data display and drawing conclusions. Data analysis is done best where there is a
good understanding of the person being interviewed, the interviewer is open-minded
and there are good listening skills from the interviewer. Direct quotes may also be
used as a way of getting the most meaning from the interview (Reason & Rawlings,
1981).
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1.7. Limitations of the Study
A limitation of this study was time and availability. Many respondents gave an
undertaking that they could partake in the interview but did however not follow
through when it came to setting a date and time. It became apparent that despite
many respondents being requested to participate in the interviews, only a few were
willing to participate.
The study seeks to gain an understanding of the way NCA is perceived. However, the
perceptions of the credit regulator could not be obtained, and this could have added
another dimension to the study. The study therefore draws on the views of the
Woolworths Hillcrest credit providers and an employee of the dti.
1.8. Overview of the Study
The chapters in the dissertation are organized as follows:
a) Chapter 1 introduced the study and presented the background, objectives, an
outline of the methodology, and study limitations.
b) Chapter 2 presents the literature review and focuses on the evolution of the
NCA and the impact of the NCA.
c) Chapter 3 explains the research methodology and elaborates on the data
collection methods and analysis.
d) Chapter 4 presents the findings from the data collected from the interviews,
and relates the findings to previous research.
e) Chapter 5 sets out the conclusion and recommendations.
1.9. Conclusion
In this study, the focus was on how the NCA was perceived by those who are affected
by it. The study seeks to gain an understanding of the way the NCA has impacted the
13
lives of people and whether it satisfies the intention of the legislature. This chapter
highlighted the background, problem statement, objectives, research methodology,
and limitations of the study.
In the next chapter, a literature review which focuses on how the NCA evolved from
previous legislation and the way it has impacted society, is presented. The focus will
also be on consumer behaviour and how internal and external factors play a role
(Lejniece, 2011).
14
CHAPTER TWO – LITERATURE REVIEW
2.1. Introduction
This chapter aims to take a closer look at the relevant literature pertaining to the NCA,
which was introduced to support the economic and social welfare of South Africans
through a transparent, fair and accessible credit market designed to reduce the risk of
people incurring more debt than they can afford to service.
According to the dti (2004) policy framework for consumer credit, the government
played a pivotal role in providing the stage for economic players – private, public,
companies and consumers – that are striving for and to obtain economic
transformation. In those industries that require regulation, government has
implemented mechanisms that open the economic advantages of that industry whilst
ensuring that social costs are kept at a minimum, and not forgetting to address social
objectives, such as black economic empowerment.
2.2. Definition of Consumer
The Consumer Protection Act (2008, p.18) defines a consumer as:
“(a) a person to whom those particular goods or services are marketed in the
ordinary course of the supplier‟s business;
(b) a person who has entered into a transaction with a supplier in the ordinary
course of the supplier‟s business, unless the transaction is exempt from the
application of this Act by section 5(2) or in terms of section 5(3)”
A consumer is someone who can make the decision on whether or not to purchase
an item at the store, and someone who can be influenced by marketing and
advertisements. Any time someone goes to a store and purchases a toy, shirt,
beverage, or anything else, they are making that decision as a consumer.
15
According to Mcquoid-Mason (1997), a consumer is defined in the broad sense as
everyone in society, or in a narrow sense as any person who uses goods and
services. Based on the Free Dictionary (2003), a consumer is defined as one who
acquires goods and services to use or own.
The NCA (2005, p.9) defines a consumer as:
a) “the party to whom goods or services are sold under a discount
transaction, incidental credit agreement or installment agreement;
b) the party to whom money is paid, or credit is granted, under a pawn
transaction;
c) the party to whom credit is granted under a credit facility;
d) the mortgagor under a mortgage agreement;
e) the borrower under a secured loan;
f) the lessee under a lease, not for immovable property;
g) the guarantor under a credit guarantee;
h) the party who received money or credit under any other credit
agreement”.
2.3. Credit Defined
According to Oxford Dictionaries, credit is acquisition of goods and services based on
mutual agreement that payment will be received at a future date. The term may also
have reference to the borrowing capability of a company or individual.
The credit provider is referred to by the NCA (2005, p.11) as:
a) “the party who supplies goods or services under a discount transaction,
incidental agreement or installment agreement;
b) the party who extends credit under a credit facility;
c) the mortgage under a mortgage agreement;
16
d) the lender under a secured loan;
e) lessee under a lease, not for a secured loan”.
2.4. South Africa’s Economy
According to Nowack and Ricci (2005), in 1994, the current government was to inherit
the economic and social effects of apartheid. The country was made up of a large
number of unskilled and unemployed workers; vast poverty; below average access to
education; and health for most of the population was poor. The adverse impact of
HIV/AIDS resulted in the health system experiencing strain and also saw a decline in
life expectancy. As a result of internal capital controls, economic sanctions and
political isolation from the rest of the world, South Africa‟s economy was cut off from
the rest of the world. Despite facing so many obstacles, South Africa was able to
raise its economic growth and standard of living for the people. During 1995 and
2003, real gross domestic product (GDP) grew by about 3%, approximately double
the growth rate recorded between 1980 and 1994. Economic performance
strengthened due to the government‟s focus on public finances and the increase in
productivity performance as a result of the removal of trade sanctions in the 1990s.
2.5. The Impact on Poor Communities
The formal and informal providers make up the South African financial services
setting. Formal financial service providers are governed by official laws and
regulations, i.e. bank accounts, credit cards and annuities. Formal services are easily
available in South Africa‟s urban areas, but they fail to cater for the needs of the poor.
The informal financial services sector encompasses stokvels and mashonisa‟s (loan
sharks) giving out loans. There is no adherence to the informal financial services laws
except those that work for their members (NCR, 2007).
17
As a result of South Africa‟s past, there is a strong link between a person‟s race and
their income bracket. Poor (usually black) households usually utilise informal,
unregulated financial services regardless of the costs and risks due to the
convenience of the products (Community Microfinance Network, 2004).
Figure 2.1 below gives an indication as to the percentage of demographic groups in
South Africa who do not have a bank account
Figure 2.1: Table depicting demographic groups without bank accounts
Percentage
Of people
Demographic groups
Source: Southern Africa Regional Poverty Network (2005)
Figure 2.1 depicts the various demographic groups that lived without a bank account.
In 2005, 48% of South African adults did not have basic banking facilities.
2.6. Rise in Consumer Debt
According to Kelly-Louw (2008), despite the impact of the recession, statistics by the
SARB and the NCR revealed that consumer spending is still high.
18
As a result of high consumer spending, many consumers have become over-
indebted; this fact is elucidated by the large number of consumers that requested
debt review based on the NCA (Coetzee & Roestoff, 2012).
Generally, the manner in which consumers spend and save is determined by factors
such as material needs, social needs, living standards, traditions, indebtedness and
net worth. Within households, consumption expenditure is determined by actual and
expected changes to consumer‟s income and their ability to utilise future income
today through the use of credit cards.
According to Steyn (2012), 2011 proved to be a year where retail sales, credit
demand and consumer spending rose along with an increase in residential rental
rates and government tax. The largest growth since the 2009 recession occurred in
the third quarter of 2011, which was up by 1.5%, according to the quarter labour force
survey. Credit demand rose 6.2% year on year based on November and December
SARB figures. The NCR stated that credit applications rose by 20.83% in 2011.
According to Ebony Consulting International (2004), over-indebtedness is as a result
of (i) aggressive lending, and (ii) uninformed or naïve clients.
Table 2.1: Literacy and basic education aged 15 and over
Level of Education
General Population Census (1996)
General Population Census (2001)
Full generation
education (grade 9
and above)
13.1 million 15.8 million
Less than full
generation
13.2 million 14.6 million
19
education (less
than grade 9)
Less than grade 7
8.5 million 9.6 million
No schooling 4.2 million 4.7 million
Source: Aitchison and Harley (2004).
Table 2.1 depicts the basic level of education amongst South Africans from 1996 to
2001. In 2001, approximately 16% of the adult population was not schooled. This
table indicates that, from 1996 to 2001, millions of people in South Africa were not
educated and, as a result, would lack the requisite consumer understanding of the
NCA.
According to Ferk (2007), debt is a tool of sustaining consumption over a period of
time. Households can be faced with a situation where they are over-indebted and
unable to sustain their debt; for example, if a household‟s circumstances change due
to retrenchments or death. The economy will also feel the ripple effect of over-
indebtedness in the event that households fail to pay their debt. This is due to the
effect of households‟ spending and saving patterns.
Business Day Editorial (2007) argues that the increase in credit is a result of greater
access to credit for low-income earners as a result of employment instead of demand
from the previous borrowers. The article also states that government‟s R416 billion
infrastructure spending initiative resulted in a credit boom that was assigned to
corporate borrowing. The article makes an interesting point, namely, that the increase
in corporate borrowing will have positive effects on the economy.
20
2.7. The Evolution of the NCA: Historical Overview
Usury legislation is the predecessor of NCA, it sought to regulate credit of whites to
the exclusion of non-whites in South Africa but this piece of legislation was flawed as
a result of how credit legislation has evolved, which follows below.
According to the South African Law Commission Working Paper 46 (1991:18-24),
usury legislation is divided into “first, second and third generation consumer credit
laws”.
First-generation consumer credit laws
“First generation consumer laws” occurred prior to South Africa being a union. The
aim of the law was the removal of uncertainty regarding charging interest. During that
era, there was no common or statutory law control over the highest finance charge
rates that were in place. Amongst the differing colonies, interest rates were dealt with
in different ways, and there was no consistency.
Section 1 of Act 6 of 1858 (Natal) stated that individuals and companies were able to
borrow at an interest, or premium or discount, that was decided between the person
borrowing and the person lending the capital. In 1908, the Natal Act was modified to
give the “natives” protection. They were charged a maximum of 15% interest per
annum.
Second-generation consumer laws
Grove and Otto (2002) referred to second-generation consumer credit laws because
they were applicable on a national level. The Usury Act of 1926 was applicable to
moneylending transactions. The NCA introduced interest for loans that was
determined by the loan size. For example, loans lower than 10 pounds had an highest
interest rate per year of 30%, and loans over 50 pounds had a maximum interest rate
21
per year of 12%. Contravention of these provisions would result in crime and liability
of a fine of 100 pounds at the most.
The Minister of Finance instructed an investigation into the Usury Act of 1926. The
committee completed its report, and within a few months, the Limitation and
Disclosure of Finance Charges Act was passed, and it had the effect of repealing the
Usury Act of 1926; later, it became the Usury Act 73 of 1968. The purpose of the NCA
was:
“To provide for the limitation and disclosure of finance charges levied in respect of
Money lending transactions, credit transactions and leasing transactions and for
Matters incidental thereto; and to repeal the Usury Act” (Usury Act, 1926, p.1).
The Usury Act of 1968 applied to credit, lease and money lending transactions (NCR,
2006, p.22) and was confined to loaning transactions that were below R500 000 and
lease agreements that were not below R100 000. This Act was implemented during
apartheid, and as a result, there were financial exclusions of the non-white citizens,
particularly the black majority of the South African population. In 1992, the Minister of
Trade instituted an exemption in the Usury Act. The exemption gave the freedom to
charge interest on small loans that were not regulated. The aim of such legislation
was to boost borrowing to small businesses. The effect was a boost in the micro-loan
sector but not to the intended recipients. The micro-lending sector directed urban,
employed persons by segmenting the market and as a result, lower income people
were excluded from the banking sector and access to formal credit options (Meager,
2005).
Third-generation consumer credit laws
According to Grove and Otto (2002) the second-generation laws were modernized
with the introduction of the third-generation laws. The Credit Agreements Act, 1980
22
cancelled the Hire-Purchase Act and controlled the contractual aspects of installment
sale transactions.
The Credit Agreements Act, 1980 is applicable to specific credit agreements in
relation to movable goods. There was little consistency in the transactions that gained
protection, whilst the Usury Act of 1968 was more comprehensive. The inconsistency
of the statutes created a legal problem because some items were regulated by both
statutes, and there were still items that may not have been regulated by either Act. As
a result, the applications of the requirements for financial transactions that were
inherently very similar were not clear. There were numerous differences in the
compliance costs, and standards were applicable to:
a) Usury Act and money-lending;
b) Exemption Notice and money-lending;
c) Credit Agreements Act and purchase of goods on credit; and
d) Credit regarding items that were not listed and may not be governed by
either law (Meager, 2005).
It was during mid-1990 that Alec Erwin, the then Minister of Trade and Industry, noted
that excessive interest rates were being levied on poor and low income South
Africans. The effect was the removal of interest controls without regulatory
supervision and credit protections (Meager, 2005).
According to Meager (2005), after five years of discussions, the Microfinance
Regulatory Commission (MFRC) was formed in 1999. The MFRC amended the
procedure of obtaining exemptions, mainly as a response to concerns over interest
rates that were high and abusive practices in the micro-lending market.
The MFRC utilised the usury laws to incentivize ethical conduct and transparency
from Microfinance Institutions (MFIs).Micro-lenders who failed to enroll with an
23
accepted regulatory authority were no longer able to make the grade for an
exemption and were required to comply with the strict usury rates (Vermeulen, 1999).
According to Ryan (2005), the result of the MFRC‟s research was the identification of
several problems with the credit legislation, namely:(1) consumer protection that was
not effective, specifically for low-income groups; (2) limited credit; (3) high credit
costs; and (4) reckless behaviour by some credit providers. There was also additional
research that revealed undesirable practices by micro-credit intermediaries, debt
administrators and debt collectors.
In 2005, the NCA replaced the Usury Act, the Credit Agreements Act and the
Exemption Notice to the Usury Act. The NCA was assented to in 2006 (Government
Gazette, 2006). The NCA came into effect in three phases. According to Otto (2006),
the NCA was intended as a mechanism that would promote and advance the social
and economic welfare of South Africans through the promotion of a fair, transparent,
competitive, sustainable, responsible, efficient, effective and accessible credit
industry, and provide protection of consumers.
Credit bureaus, consumers, and all providers of credit have had to familiarise
themselves with the new NCA. Consumers were given rights and introduced to ways
that allowed them to obtain information and make decisions prior to purchasing on
credit. Credit providers were also responsible for granting credit to consumers who
failed to afford it. Credit bureaus are being regulated based on the manner they do
business. Regulations of the NCA stipulate the highest interest rates and transaction
fees that are levied on credit agreements or loans.
Temkin (2006) cites the director at Deneys Reitz, Shawn Barnett as saying that the
NCA has been based on the beliefs of various market participants that (South
Africa‟s) current credit legislation fails to be effective in addressing the requirements
of a complex consumer market.
24
In response, the NCA has brought about lending laws that require fair transparent
pricing, which can be achieved partly through publication of effective rates. To ensure
that the lending laws remain transparent, the NCR will screen and regulate the NCA.
2.8. The Role of Credit in an Economy
According to the dti (2003), agreements on credit are important for a person who
wishes to get merchandise or a facility they cannot pay for in cash or would rather not
pay cash for that item. Credit allows a person to utilise a manufactured product or
facility at a cost that is embodied by an interest rate before they pay for the product or
service or spread payment over numerous months if it cannot be purchased from only
a month‟s salary. It would be impossible for most people to purchase houses, cars,
fridges, beds, radios, television sets and even university education without getting
finance.
Although credit can be a useful instrument to acquire products and services that could
not be obtainable from one month‟s salary, the disadvantage is that it may result in a
high level of indebtedness. Credit may also result in financial difficulties because
people take out loans to service existing loans. Over-indebtedness may also result in
absenteeism, demotivation and even theft (the dti, 2003).
2.9. Factors That Affect Consumer Behaviour
There are various factors that have an effect on consumer behaviour. These factors
include psychological, personal, and social factors. Psychological factors are
perceptions, knowledge, personality, motivation and mental processes. It is the way in
which human‟s analyse and make choices. Attitude may have an effect on human
behaviour in three ways, namely,
a) exploration, and conscious mind movement;
25
b) impressions that have an effect on consumer‟s emotional approach to
credit; and
c) behaviour model (Lejniece, 2011).
Personal factors are subjective to the consumer and the way they reach a decision.
These are demographic factors, i.e. nationality, income level, age; and situative
factors, i.e. changes in physical conditions of consumers. Finally, social factors are
the effect family and friends have on a consumer‟s decision-making process. Social
factors may have an influence on the choices consumers make regarding credit.
Consumer behaviour is affected by internal and external factors in considering
whether to obtain credit or not (Lejniece, 2011).
2.10. What is the NCA?
The NCA seeks to act as a tool that serves as a guideline of credit that is given to
consumers by all credit providers. Allowance is made for the creation of formal bodies
such as the NCT and the NCR, which have a crucial role in enforcing the NCA, and
granting consumers and credit providers the opportunity to address any
contraventions of NCA (Kirsten, 2006).
2.11. Purpose of the NCA
Consumers, particularly those who are illiterate, were subject to exploitation from
credit providers as a result of the unequal distribution of power when they engage in
credit agreements. Approximately 38% of South Africans are low-income earners,
earning between R1500 and R5000 per month (Finscope, 2004). The low-income
earners only had access to microfinance. Because of that, micro financers would
exploit this market with overpriced debt, which consumers were not able to afford.
The NCA was promulgated with the purpose of furthering the economic and social
welfare of South Africans through the promotion of a credit market that is transparent,
sustainable and fair.
26
Below is a discussion that helps one gain an understanding of the objectives of the
NCA and its impact on institutions and consumers.
In order for a person to be able to get credit, they need a bank account along with
credit history. In Finmark (2003), it was discovered that 37% of Living Standards
Measure (LSM) 3-8 segments were partially banked, and 37% were unbanked. These
are some of the characteristics of someone who did not have a bank account
(Finscope, 2004, p.1, 3; Falkena et al.,2004):
a) no transactional account;
b) poor education;
c) reside in township and rural areas;
d) no constant cash flow; and
e) 55% do not have a credit history.
The main aim of the NCA is to have one law that applies to credit providers and
consumers and protects theirs interests (the dti “Policy Framework” paragraph 4.7-
4.8). The NCA reaches a wider field, especially because it is applicable to credit
regardless of the amount as compared to its predecessors, the Usury Act 73 and
Credit Agreements Act 75.
Levenstein (2006) states that there are many people in South Africa that have little
money but that have been given access to too much credit. This results in over-
indebtedness which traps South African in a cycle of debt. The NCA focuses on
consumer rights and has few rights for credit providers.
It is the responsibility of the NCR to educate and inform people about the provisions
of the NCA. Section 92(1) requires that there be a pre-agreement statement given to
the consumer, one that serves as a quotation before a credit agreement of less than
R15 000 is entered into. The quotation is valid for a period of five business days; this
27
is an option created by statute (Otto, 2006).Section 93(1) of the NCA states that it is
the credit provider‟s obligation to furnish the consumer with a copy of the credit
agreement. The dti “Policy Framework”, chapter 5 considers the fact that consumers
need help to make choices. As a result of poor disclosure of the cost of credit and
financial implications of the product, it is not always easy for a consumer to make an
informed choice. For that reason, information must be simple.
The NCR is tasked with the implementation of the NCA. The NCR supervises the
entire consumer credit industry including the MFRC regarding micro-lending. The
NCR acts as an independent juristic person that is governed by a board, and the chief
executive officer is able to appoint investigators. The responsibilities of the NCR are
set out in section 13-18 of the NCA. On 1 September 2006, the NCT was established.
It has jurisdiction throughout South Africa. Its function is to adjudicate on matters
brought before it on the basis of the NCA.A consumer‟s debt can be enforced by the
court, but only if the consumer has been made aware of the default in payment and a
certain amount of time has passed. A complaint may also be referred to the NCR,
which would be the beginning of an application to the NCT.
The restricting process occurs in the following process: a court may consider a
person to be over-indebted (s85 (b)), or a consumer is referred to a debt counselor
(s85 (a)). The consumer is also able to request the debt counselor to declare him/her
over-indebted. Therefore, once there is an evaluation by the debt counselor, a
consumer may be found to be over-indebted. The debt counselor can then make a
recommendation to the Magistrate‟s Court that the credit agreement should be
declared reckless (s86 (7) (c)(i) read with s80), or there can be a rearrangement of
the consumer‟s debt (s86 (7) (c)(ii)). But should the debt counselor not find the
consumer to be over-indebted but having difficulties to repay the debt on time, there
can be a voluntary agreement of a new repayment plan (s86(7)(b)).
28
2.12. Implementation of the NCA
It is the NCR that is in charge of the enforcement of the NCA through dispute
resolutions between consumer and credit provider, addressing complaints about
contraventions, monitoring the credit industry to ensure that any conduct that is
contrary to NCA is stopped or prosecuted. The NCT attends to the adjudication of
claims and issue fines where necessary (National Credit Act 34 of 2005).
2.13. The Guideline for the Cost of Credit within the Microfinance Industry
According to David (2003), the microfinance industry began in the 1980s with Non-
governmental Organization (NGO‟s) and government departments playing key roles.
The industry grew in four phases, namely, pioneer, breakout, consolidation and
maturity.
The pioneer phase (1980s to 1994) was made up of non-profit and commercial
lenders who propelled microloan products into the industry, as a result of international
anticipation over microfinance, to encourage microenterprises to engage the
increasing labour and to market the mobile population being separate from the
traditional banking credit system.
The breakout phase (1995 to 1999) occurred with the pioneers becoming very
successful as a result of the rapid expansion of the micro-lending market. Post 1992,
due to the exemption to the Usury Act removing price restrictions on small and
shorter-term loans, microcredit was legalised.
In 1997, there were approximately 3500 formal MFIs; the loan volume multiplied from
R3.6 billion to R10.1 billion. There was apprehension due to the excessive interest
rates and the automatic deductions of loan repayments from bank accounts or
salaries from those who borrowed.
29
The consolidation phase (2000) meant that microfinance was difficult to sustain due
to a few creditworthy borrowers; this resulted in a decrease in profit margins and risk
standards and the government making payroll borrowing illegal and establishing the
Microfinance Regulatory Council (MFRC) to regulate micro-lending.
The maturity phase is when the industry‟s growth rate is sustainable in the long-term
and complies with the regulatory framework. This phase has not been reached, but it
appears to be imminent. The flow chart by the NCR below in Figure 2.2 depicts 12
months that end in May 2007. The microloan payouts increased by 16%; this is a
depiction of a decrease from annual rates of 19% in the previous year.
The NCR has tried to create a credit market that is easily available, with priority being
on historically disadvantaged, low-income communities.
Figure 2.2 below depicts the amount of money spent on loans.
Figure 2.2: Total Micro Lending Loan Book as at the end of each quarter
30
Source: National Credit Regulator (2008)
2.14. Consumer Protection of Consumer Credit
The NCA as a form of credit regulation has attracted various opinions. In the
Consumer Protection Bill (2006), the Free Market Foundation of South Africa states
that government‟s intervention to protect consumers is welcome, but it is also of the
view that free competition can also create a system where there are greater choices,
where prices would decrease, and there would be an increase in wages. Over-
regulation can have the effect of crippling growth and increasing costs for consumers.
The regulation of credit needs to be implemented in a manner that seeks to regulate
abusive lending practices and grant consumers protection. A study conducted by Blue
Financial Services (2007) considered whether there was clarity on consumers‟
perception or awareness of the NCA and its impact. The findings of the study were
that awareness and understanding of the NCA was poor; fifty per cent of the sampled
individuals failed to relate on the impact of the NCA on their lives.
2.15. Disclosure Policies
According to Braunsberger, Lucas and Roach (2004), the changes to the Truth in
Lending Act (2004) introduced Regulation Z; this was intended to assist consumers
identify and understand cost information. It was found in their study that the Annual
Percentage Rate (APR) fails to translate to consumers‟ processing information. The
APR was viewed as a distraction to consumers considering important cost
information.
The US Truth and Lending Act, which came prior to the Consumer Credit Protection
Act in 1968, was for disclosure of certain information and, as a result, imposed
31
compliance costs on creditors (Durkin, 2002). The effectiveness of the NCA was
questioned regarding consumers‟ understanding of credit matters.
The NCA imposes on credit grantors to disclose the cost of credit, so that it is easy for
a consumer to compare with differing credit grantors. The disclosure of credit is aimed
at increasing competition between credit grantors, thereby making credit more
accessible to consumers. The NCA does also stipulate the limits of the interest rates
charged to consumers.
2.16. The Credit Market – Credit Usage, Supply and Demand 2.16.1. Introduction
According to the NCR, the NCA also seeks to increase South Africans‟ access to
finance. The NCA sought to increase access to finance through the creation of a
piece of legislation that was inclusive of all members of the South African Economy.
2.16.2. Size of credit market Below is a look at the current market and debt problems faced by South African
consumers.
Figure 2.3: Size of credit market
32
Source: National Credit Regulator (2012)
After the inception of the NCA, there was a decline in credit granting in South Africa,
which resulted in the market growing. Credit granting in 2011 grew to the same level
as in 2007; therefore, there was an increase in the access to credit in the market
because, in 2011, the economic conditions were more subdued than in 2007.At the
end of 2011, the credit market was R1.3 trillion.
Figure 2.4: Repayment experience – credit standing of consumers
Source: National Credit Regulator (2012)
In 2011, there was a decline of loans that had a good standing to 58%; forty per cent
of the loans were up-to-date with payments. The balance of 19% was in arrears.
2.17. Impact of the NCA on Access
The credit pricing and gaps in the interest rate in the Usury Act (1968) and Credit
Agreement Act (1980) were not effective to protect consumers. Consumers were left
vulnerable to the costs of credit and exploitation by credit providers. The NCA is a
government-intervening tool used to consider the past imbalances and form an
effective credit market.
33
2.18. Different Countries’ Regulatory Regimes 2.18.1. Introduction
According to the NCR, the World Bank Africa region‟s strategy aims at supporting
developmental goals towards reducing poverty by increasing the poor‟s access to
sustainable financial services. It is imperative to have affordable instruments for
credit, insurance, savings and payment transfers.
2.18.2. Nigeria
Consumer protection in Nigeria is at a developmental stage. The Consumer
Protection Council Act No. 66 of 1992 creates a forum where consumers are able to
complain and allows for the creation of a council, the Consumer Protection Council
(CPC). The council acts as a mediator. The Central Bank of Nigeria has a hand in
consumer financial protection, but there is no piece of legislation or regulation on that
particular topic (National Credit Regulator, 2007).
2.18.3. Ghana
In Ghana, there is no consumer protection law in existence. There was a strategy for
consumer education, and financial literacy in microfinance was instituted in January
2009. The Bank of Ghana has tasked the Investigation and Consumer Reporting
Office (ICRO) to protect financial consumers in Ghana. It is the ICRO that gets
customer complaints, grievances and petitions.
2.18.4. Indonesia
The legislation that governs consumer protection in Indonesia is the National
Consumer Protection Agency (NCPA).Its main aims are to:
34
a) create a consumer protection policy;
b) develop consumer protection NGOs;
c) educate people about consumer protection; and
d) attend to consumer complaints.
Indonesia established the Consumer Dispute Settlement Board that has forums which
seek to provide a platform for resolution of consumer disputes. The board has the
power to impose administrative sanctions.
2.19. Consumers’ Perceptions Regarding Credit Providers and Their Products
According to the dti‟s (2003) credit review, consumers expressed dissatisfaction at
the disclosure of the cost of credit, credit products, and the manner in which credit
providers view complaints. Regarding disclosure of information, only a small
percentage of people read the contract, but there appears to be a limited
understanding of the contents of the contract. The contracts also seem to be one-
sided, with the rights of the credit providers being given weight above the consumer.
This implies two things, namely: (a) there must be an increase in educational
advertisement, marketing and brochures, and (b) contracts must not be one-sided.
Consumers also state that when they apply for credit, they are usually desperate to
acquire cash and do not spend the required amount of time reading over the contents
of the contract. Consumers are usually in a vulnerable position because their credit
application can easily be denied as a result of a bad credit record or over-
indebtedness (the dti, 2003).
2.20. Consumer Attitudes about the NCA
According to a case study performed by the dti, consumers expressed the view that
they lack adequate information of credit contracts and their subsequent rights.
35
Consumers expressed the view that whenever they were seeking finance, their focus
was on obtaining money and not the actual cost of that finance or the contract terms.
It is evident that consumers are dissatisfied about the information they receive as to
the cost of credit (the dti, 2003).
2.21. The NCAs impact on the Prevention of Unfair Credit Practices
According to Dippenaar (2013), the NCA divides credit agreements into three
categories, namely: small (0-R15 000), intermediate (R15 001-R249 999), and large
agreements (over R250 000) in order to prevent the granting of reckless credit, to be
compliant with the reporting requirements, and to disclose certain information. Prior to
a provider of credit signing a credit agreement or increasing credit, the provider of
credit is required to ensure that the purchaser is conscious and comprehends the cost
and risks of the credit. Consideration is also made of whether a consumer was able to
pay back debt in the past, and their current economic means and financial
commitments must also be factored in when the credit application is assessed.
A credit provider who has entered into an excess of 100 credit agreements or who
has a balance of credit is in excess of R500 000 that is due to him must register with
the NCR. Failure of the provider of credit to register will result in credit contracts with
the credit provider being prohibited and any cash paid to the provider of credit being
payable with interest (Dippenaar, 2013).
Providers of credit are required, according to section 62-68 of the NCA, to submit the
following documents:
a) Compliance report: The report is completed each year and completed
six months prior to the provider of credit‟s financial year end.
b) Statistical report: The report is completed on recommended form 39.
c) Annual and Financial Operational Return: Form 60 is to be concluded
annually.
d) Assurance Engagement: Completed within six months of financial year.
36
e) Annual Financial Statements: This report must be inclusive of
auditors/financial officer‟s reports, and it must also be done annually half
way through the provider of credit‟s financial year end.
The NCA is at heart a piece of legislation that was drafted to protect the consumer
because the credit provider‟s rights outweigh the rights of the consumers. Consumers
are now able to enforce the rights contained in the NCA. The researcher‟s opinion is
that consumers are not aware of the purpose of the NCA and the potentially complex
process of debt collection as well as the purpose of the NCR, that seeks to
standardize the implementation of consumers‟ rights.
2.22. Challenges of the NCA
The NCA sets up objectives to make the credit industry open, fair and responsible.
The main theme that is in the objectives of the NCA is to provide consumers with
protection. These objectives have cost implications for banks, credit providers and the
government. An article in the Business Day states that analysts place the cost for
bank compliance at R2 billion per annum (Nyamakanga, 2007).
South African banks have been required to train their staff to comply with the NCA,
amend their procedures, and align their charges to the NCA requirements. The banks
were left with the task of conveying to consumers the impact of the NCA regarding
their ability to access credit. The NCA requirement has resulted in the following
changes:
a) Market share (new markets were created for banks, but credit growth was
restricted).
b) Credit granting policies (there is scrutiny regarding why credit was
granted).
c) Reporting and monitoring (compliance reports).
d) Collection processes (debt counseling procedure).
37
A big challenge that the banks have to address is the risk of engaging in a reckless
lending agreement with consumers. Section 81 states that credit providers must
refrain from concluding reckless agreements with consumers. It is the obligation of
the credit provider, prior to engaging in the credit agreement, to take reasonable
measures to ascertain the consumer‟s understanding of the risks and cost of credit,
the consumer‟s ability to repay debt in the past, and the current financial
circumstances of the consumer. The credit agreement is considered to be reckless if
the following occurred:
a) On conclusion of the credit agreement, the bank did not conduct the
required assessment; or
b) The agreement was entered into regardless of information that indicated
that the consumer did not have an understanding of the risk and costs of
the agreement or the agreement would result in the consumer being
over-indebted (Davel, 2008).
Failure of the bank to comply with the NCA and to engage in a reckless agreement
has the consequences of the agreement being set aside, and that can result in a
financial loss for banks or damage the goodwill of the bank.
A consequence of the NCA for consumers is that credit grantors scrutinize their
application and can be reluctant to grant credit; as a result, there will be less people
who can access credit.
Local and international community‟s supported South Africa‟s financial regulation
policies, and they were viewed as effective. In the United States, the sub-prime crisis
has created the requirement for debt counseling, to assist consumers to manage debt
stress. Numerous countries throughout the world are leaning towards preventative
measures in the NCA, for example, rules on reckless lending (Davel, 2008).
38
2.23. Access to legal assistance to address unfair acts of businesses
According to Woker (2011), an adjudicative body that has been established by the
NCA is the NCT. The NCT seeks to establish whether any prohibited conduct in terms
of NCA has occurred, enforce the NCA and address any credit providers that have
gone against the NCA. The NCT offer an affordable alternative to civil courts because
in certain instance such as consent orders NCT has jurisdiction to deal with such
matters.
2.24. Conclusion
The NCA was implemented to correct the imbalances of power amid the consumer
and the credit provider. It appears to have afforded consumers protection by taking
into consideration each consumer‟s financial circumstances before granting them
credit and acting as a watchdog over credit providers. This chapter mentioned the
way credit legislation has evolved over the years, the importance of credit to the
economy and the effects, and the impact and challenges of the NCA.
39
CHAPTER THREE – RESEARCH METHODOLOGY
3.1. Introduction
This chapter deals with the research methodology used in this study to determine
perceptions of the NCA. The study utilizes qualitative research in order to access rich
data. The research design methods are elaborated on in order to gain clarity on the
process that the researched engaged in to obtain data.
3.2. Qualitative and Quantitative Research
Quantitative research is numerically orientated. Data collected in quantitative
research is – regardless of its original form – adapted into numbers in order to easily
interpret and statistically analyse. The main advantage of the quantitative approach is
that it is easy to work with numbers, and the data is readily collected, coded,
summarised and analysed. A researcher is able to utilise one set of data to draw an
inference on the characteristics of other similar populations. The disadvantage of
quantitative research is that researchers gain a great deal of knowledge about
collective or average experience of the research participant but lack insight into their
individual experiences (Dunn, 2010).
Qualitative research is reliant on verbal reports, descriptions and interpretations of
proceedings. Qualitative data is not numerical nor is it subjected to traditional
methods of analysis. A benefit of the qualitative approach is that it is an open system
because it does not limit the ambit of the answers given; it utilises and discloses the
richness of the human experience. Studying the way people respond to a given
stimulus can be fascinating, because it makes one think and is eye-opening due to
there being no “right” way to interpret it. The open nature of qualitative research is
useful when it comes to generating a hypothesis, when investigating a topic. A
disadvantage of qualitative research is that it cannot be easily or quickly summarised,
nor can it generalise qualitative observations to other situations (Dunn, 2010).
40
Qualitative research allows the researcher to discover the feelings and emotions
behind words in a manner that is not possible with a quantitative method.
Respondents‟ comments that are based on one‟s personal experiences cannot be
easily investigated; the factors that affect thoughts and emotions are not revealed in a
questionnaire. Accordingly, qualitative data collected through interviews act as a
vehicle to gain rich data that quantitative methods cannot provide.
The research is based on the qualitative approach, and data was collected using
semi-structured interviews. This enabled the researcher to discover the factors that
influence the respondents‟ perceptions of the NCA.
3.3. Research Philosophy and Approach
The research philosophy can be divided into three main areas (namely, interpretivism,
positivism, and realism), but it is rare to find research that can be placed in just one of
these areas.
Interpretivism aims to gain an understanding of the subjective reality of the people
being studied in order to gain an understanding of their actions, motives and
intentions in a way that will be meaningful to the research participants (Saunders,
Lewis & Thornhill, 2003).
Positivism can be compared to a natural scientist that makes law-like observations
and generalisations. The researcher takes on the role of an objective analyst who
utilises structured and replicable methodology that requires statistical analysis
(Saunders et al., 2003).
Realism means that reality exists independent to human beliefs and thoughts.
Realism identifies the significance of understanding people‟s socially construed
interpretations and meaning whilst still trying to comprehend broader social forces,
41
structures or processes that can affect and constrain people‟s views and behaviours
(Saunders et al., 2003).
The philosophical position that was accepted in this research is a combination of
interpretivism combined with realism.
The hypothetic-deductive method which is mainly used in quantitative research is a
scientific method that utilises a step-by-step logical method to discover a solution to a
problem. The hypothetic-deductive method popularised by Austrian philosopher Karl
Popper is a useful systematic way to solve basic and managerial problems. This
method is made up of seven steps of identifying a broad problem, defining the
problem statement, hypothesising, determining measures, data collection, data
analysis, and interpretation of results. A key to the hypothetic-deductive method is
deductive reasoning, which is a general theory that can be applied to a specific case.
Inductive reasoning works in the opposite direction, whereby a specific phenomenon
is observed and based on a conclusion that is reached (Sekaran & Bougie, 2010).
3.4. Research Design and Methods 3.4.1. Sampling and Sample Size
Purposive sampling is gathering information from targeted groups instead of where it
is conveniently available. The sampling is confined to types of people who are able to
provide the required information. There are two types of purposive sampling:
judgment and quota sampling. Judgment sampling is selecting the best positioned
subjects to supply the information, which is the type of sampling that will be used in
this research (Sekaran & Bougie, 2010).
In this study, there was a combination of participants interviewed that were
knowledgeable about the NCA and its application. The focus is not on expertise about
42
the NCA per se but on people that have had practical dealings with the NCA and their
subsequent perceptions.
The sample was made up of credit providers (who are frontline employees who deal
directly with customers). The respondents of the interviews were made up of six
Woolworths Hillcrest employees, the Manager of Customer Services at Woolworths
Hillcrest, and the Deputy Director Consumer, Competition Law and Policy at the dti
(who has been working with the Consumer Protection Act (CPA) and the NCA in the
course and scope of his employment).
The interviews were recorded and transcribed, and the written record was sent to the
interviewees for their input.
Eight respondents, which will be referred to as ( R ) in the next chapter to protect their
identity, were interviewed, and an analysis per category is detailed below.
Table 3.1 below explains the categories of people that were chosen to partake in the
study.
CATEGORY TOTAL Woolworths employees and Manager 7
Deputy Director Consumer, Competition
Law and Policy at the dti
1
TOTAL 8 Table 3.1: Details of respondents
Source: Compiled by the researcher
The Table above explains the type of employment of the respondents and the number
of respondents that were interviewed.
43
Prior to being able to go out into the field and interviewing the respondents, the
researcher had to obtain ethical clearance approval (Appendix3)from the University.
Before conducting an interview, respondents were first presented with the informed
consent form (Appendix2)assuring them of confidentiality and anonymity.
44
3.4.2. Data Collection
Data may be collected using primary or secondary sources. Primary data is
information that is collected by the researcher, whilst secondary data is collected from
existing sources (Sekaran & Bougie, 2010).
Primary data can be collected in various ways, for example, from the field or lab. Data
collection methods can be in the form of interviews – telephonic interviews, face-to-
face interviews, or interviews via electronic media; questionnaires administered
personally or electronically; and observing individuals, either directly or by video
recording them. Observing individuals or events, groups of events, and various
motivational techniques such a projective test can be used (Sekaran & Bougie, 2010).
Interviews are a great advantage because they are flexible and can be adapted and
the questions changed as the researcher conducts interviews. Questionnaires are
also an advantage because data is collected efficiently in terms of time and cost to
the researcher (Sekaran & Bougie, 2010).
3.4.3. Semi-Structured Interviews
An interview is when a respondent speaks and the interviewer records the answers
(Dunn, 2010).
According to Dunn (2010), interviews can be divided into five main categories:
a) Structured interviews.
b) Semi-structured interviews.
c) Non-directive interviews.
d) Focused interviews.
e) Informal conversational interviews.
45
The interview approach is dependent on the goal and objectives of the research.
Semi-structured interviews can be utilised in the collection of qualitative data.
Although there are questions that guide the interview, it does not mean that all the
questions must be covered. Questions may be incorporated into the interview, and
responses are documented by videoing, tape recording or writing down notes (Gray,
2004).
A great advantage of semi-structured interviews is that there is a lot of flexibility
because the interviewee can supply additional information and insight. This serves an
advantage to the researcher, who can gain valuable information, which the
interviewee may have through hands-on experience or knowledge.
A semi-structured interview approach was utilised in the study, as the subject matter
could be viewed as complex. Interview questions (Appendix 1) were devised with the
aim of guiding the interviewees to reveal information for the research objectives.
Although a large portion of the information has been gained by the researcher, the
flexibility of the semi-structured interviews allows for data to be gained from the
respondents, which can prove useful to the study.
3.4.4. Feedback on Interviews The interviewees were chosen carefully in this study. They had to be knowledgeable
about credit ,dealt closely with the NCA and with customers who wanted to obtain
credit. The study mainly focused on Woolworths Hillcrest employees. The dti
employee was interviewed in order to ascertain the NCA from the perspective of the
drafters and custodian of the NCA. The interviews were conducted face-to-face and
lasted on average 30 minutes.
The main difficulty was managing to arrange times to interview respondents, as most
appeared willing, but when it came to fulfilling their commitments, they were busy.
Leonard (2003) notes that face-to-face interviews have their disadvantages. It can be
46
time-consuming to transcribe and analyse transcripts. Although interviewers try to be
unbiased in their recording of the information, there can still be expectations
regarding interviewee‟s feelings, beliefs or background, which may have an impact on
the interview. Interviewees may also be influenced by the interviewer, for example,
based on their age, race, and appearance, and may give responses they believe the
interviewer would prefer to hear.
3.4.5. Research Instrument Design
A semi-structured interview is based on a set of questions. This study utilized open-
ended questions during the interviews because they allowed the participants to
respond in any way they chose and to encourage an extensive and developmental
answer (Sekaran & Bougie, 2010).
In contrast, with closed-ended questions, the respondents must choose between
alternatives given by the researcher. The answers are usually “yes” or “no” (Sekaran
& Bougie, 2010).
Interview questions should not focus on the following: jargon, ambiguity, leading
questions, double-barreled questions, or attempts at probing personal or sensitive
issues (Gray, 2004).
The funneling technique was also utilised by the researcher in this study. The
funneling technique begins an interview by asking open-ended questions in order to
get a general understanding of a situation. It is from these responses to the broad
questions that more focused questions may be asked by the researcher (Sekaran &
Bougie, 2010).
47
3.5. Construction of the Instrument: The Interview Questions
The semi-structured interview questions were constructed after carefully examining
the literature. The following questions were set:
a) Could you please provide a brief background of your experience in the
credit industry?
b) Do you think that consumers understand the purpose/benefit of the
National Credit Act? Explain the reason for your answer.
c) What are the broad categories of factors influencing credit being
granted to a consumer?
d) Do you think consumers and/or credit providers view the National Credit
Act as beneficial?
e) Are there factors influencing the credit industry that are unique to South
Africa?
f) What factors will only be experienced in South Africa?
g) Do you think consumers and/or credit providers understand the National
Credit Act and its impact?
h) Do you think the National Credit Act provides sufficient protection to
consumers?
Probing questions were also directed to the interviewees. The researcher, for
example, enquired about the day-to-day experience at Woolworths, why customers
48
were not granted credit, why African customers were less knowledgeable about
credit, and the consequences of being over indebted.
3.6. Data Analysis Qualitative data is data that is in the form of words. Examples include interview notes,
answers to open-ended questions, news articles, and many others. Analysis of
qualitative data seeks to make valid inferences from data collected.
According to Miles and Huberman (1994, cited in Sekaran & Bougie, 2010), there are
three steps in qualitative data analysis:
a) Data reduction: a process of selecting, coding and categorising data.
b) Data display: ways of presenting data.
c) Drawing conclusions: answer research questions.
To obtain data, the interviewer must have a good understanding of the interviewee,
express non-judgment, and display good listening skills. Qualitative data analysis was
used to obtain information from participants, with their focus being on the experiences
and meanings given. Direct quotes may also be used to extract the most meaning.
The theory emerges from the categories used by the participants prior to the
interviewer creating his or her own categories (Reason & Rawlings, 1981).
The first thing when it comes to the interview process is to gather data from the
participants and transcribe it. Then the information is arranged into groups. The next
step is to consider the categories suggested by respondents. Finally, the interviewer
establishes categories using the information received from prior steps. The focus of
qualitative investigators is the various meaning and interpretation in each category;
for example, with a study on the attitude of A-level psychology, their statements
placed them in a category of being negative about statistics. Considering numerous
statements may reveal reasons why A-level psychology students dislike statistics. In
49
reporting findings, direct quotes may be used as well as data analysed using the
categories (Reason & Rawlings, 1981).
3.6.1 Validity and Reliability
Conclusions reached from qualitative data must be reliable, plausible and valid. In
semi-structured interviews, there can be numerous data quality concerns (Dunn,
2010).
Bias is an issue that affects the reliability of data. Bias from the interviewer can be
presented by comments or body language, which can result in the interviewee being
influenced to respond in a particular manner. The interviewer is able to enforce their
own views in the manner questions are asked (Saunders et al., 2003).
Validity refers to the extent to which research results are accurately represented by
the collected data and transferred to other contexts. Two methods have been
advanced to ensure there is validity of qualitative data; these are:
a) Including the representativeness of cases and including cases that may be
contrary to theory (Sekaran & Bougie, 2010).
b) The following measures were taken in an effort to overcome bias.
50
3.6.2. Preparation and Readiness for the Interview
Most of the literature review was completed when the interviews were conducted.
This resulted in the researcher having background information that would be
beneficial when conducting the interviews. According to Healey and Rawlinson (cited
in Saunders et al., 2003), an interviewer is able to assess whether the information
received in an interview is accurate or not.
3.6.3. Approach to Questioning
The questions should be clear with a neutral tone. Probing questions must be worded
carefully to ensure the interviewee is not being guided to adopt the views of the
interviewer (Saunders et al., 2003).
3.6.4. Cultural Differences and Bias
Cultural differences can result in misrepresentation, which occurs when using other
types of data collection methods. The benefit of interviews is that any
misunderstandings can be resolved (Saunders et al., 2003).
3.7. Research Limitations
Despite numerous attempts to interview the credit regulator, the researcher was
unable to do so. Time and availability of respondents was a major factor for the
research; some Woolworths staff made undertaking to avail themselves for the
interview but in the end were unable to participate due to other commitments.
Another limitation of this study is the difficulty that can be experienced with qualitative
research in how data from interviews is subjective. In spite of that, Coolican (1994)
mentions that there are ways to show that the data is reliable – by comparing an
51
interview study with an observational study. Another method is to have two qualitative
researchers engaging in independent analysis of the same piece of data drawing a
comparison.
3.8. Conclusion
This chapter dealt with the methodological approach, qualitative research, which was
utilized in this study. The use of semi-structured interviews was the most effective
way to gain access to information from the interviewee and answer the question of
how do people perceive NCA. The next chapter will present the results and
discussion of the study.
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CHAPTER FOUR– RESULTS AND DISCUSSION
4.1. Introduction
The previous chapter discussed the qualitative research approach, and elaborated on
data collection and data analysis. Semi-structured interviews were used to gather
data from the respondents. This chapter presents the analysis and discussion of the
results.
4.2. Theme 1 4.2.1. Consumer Understanding
The majority of the respondents held the view that consumers lack understanding of
the NCA.
… this Act was introduced to protect both concerned parties (the financial service
provider and the consumer/target market) from an unsecured financial
relationship.(R3)
According to the expert on consumer law who was interviewed, consumers fail to
understand the NCA. He believes that the level of understanding of the NCA is based
on their level of literacy. He has the perception that people with a high level of literacy
understand the NCA, its obligations and implications, but may manipulate it. On the
other hand, people with lower literacy levels hold the belief that they should easily
access credit regardless of their financial position, but they fail to have an
understanding of their obligation.
The expert on consumer law also believes that consumers do not understand the
impact of the NCA. He raised the example that consumers are frustrated when they
apply for higher amounts and receive a lower amount. They lack understanding as to
53
why they obtain lower amounts than they applied for. From the side of the credit
providers, credit providers seem to have a greater understanding of the NCA.
Credit providers understand that the extension of credit is a mandate of government,
and it must be fulfilled in terms of the NCA… (R3)
According to a consumer survey by the Consumer Federation of America (CFA), it
was found that consumers lacked the requisite knowledge (Brobeck, 2008). A failure
to understand the NCA has negative implications on consumer awareness and
understanding. The NCA was enacted to regulate credit within South Africa and
seeks to protect consumers from the unequal bargaining power of credit providers.
Porteous (2004) maintains that, prior to the NCA being implemented in South Africa,
the consumer regulation system was disjointed as a result of legislation that failed to
protect consumers.
4.2.2. Consumer Awareness and Knowledge
It became evident from the interviews that there were many consumers who lacked
understanding of the NCA. On that account, it becomes difficult for consumers to reap
the benefits of an Act which they do not understand.
NCA has not done much for our customers because there are people who do not
understand it and its purpose... (R2)
The purpose of the NCA is to provide protection for consumers through the
integration of numerous pieces of credit legislation and, thus, to facilitate a credit
market that is fair, efficient and transparent. The NCA also seeks to balance out the
power of credit providers.
The comments of the respondents reinforce the purpose of NCA. The respondents
seemed to all hold the view that the NCA creates a uniform platform for consumers.
54
The responses of consumers portray a picture of there not being enough awareness
of the NCA. According to Blue Financial Services (2007), to gain an understanding of
consumers‟ perceptions, knowledge and understanding of the impact of the NCA on
consumers lives is needed. The study revealed that awareness was low, and that the
understanding of the NCA was not good, with approximately 50% of those sampled
failing to relate to the NCA and any impact it may have on their lives.
The NCA places the onus on the credit provider to disclose the cost of credit. The
consequence of access to information is that consumers will be able to compare
credit costs. Low consumer awareness of the NCA makes it difficult for consumers to
compare credit costs. Braunsberger et al. (2004) state that, when the variable APR is
highlighted in credit card applications, it does not necessarily result in consumers
processing information better. Rather, it has a negative effect of distracting
consumers from paying close attention to the cost of credit.
According to Durkin (2002), the Truth in Lending Act of 1968 in the United States of
America found that consumers have a greater understanding of credit agreements,
but consumers in America had the benefit of education, credit being frequently used,
and advertisements about credit. However, there are still incidences of practices
wherein abuse by credit providers is still occurring, and there is still a need to improve
education and enforcement against illegal acts.
It was revealed in this study that the majority of respondents felt that South Africans
lack awareness and knowledge on credit use or education. People still base their
views of credit according to what they have experienced personally in the process of
obtaining credit. It becomes clear that credit markets need to have financial literacy
about credit and their rights in the event that illegal practices occur.
55
4.2.3. Consumer History
The next theme that emerged was that of consumer‟s history and the impact that it
has on a person obtaining credit.
Credit providers do not view the NCA as beneficial because a person is denied credit
due to their history, and consideration of their current financial status is not
considered. (R5)
The role of the consumer‟s history in obtaining credit was mentioned by respondents.
One of the requirements of the NCA is to prevent reckless lending. In order to satisfy
this requirement of a consumer‟s history, when a consumer applies for credit from a
bank or retail agent, the information is sent to the relevant credit bureau. The credit
bureau is then tasked with matching the consumer‟s name, their address, identity
number, and other personal details to the credit application with the information that is
stored on credit bureau files (Williams, 2009).
The information about a consumer‟s history is utilized by banks and retail agents in
order to establish whether an individual is creditworthy, and whether the individual is
able to repay the debt. It is possible to see whether a person is willing to repay their
debt by looking at how timeously past repayments were made to credit providers. The
focus of lenders would be on whether a consumer paid obligations on a regular basis.
There have been debates as to whether consumer reports were accurate and can be
viewed as beneficial.
The introduction of the NCA makes credit history is crucial; nevertheless, it is also
relevant to note that consumers need to have access to information if their credit
applications were rejected as to the reasons and have tips that will give consumers
the opportunity to improve their credit rating so that they can receive credit in the
future. The NCA provides that consumers have the right to be furnished with reasons
as to why their application was not accepted.
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4.2.4. Factors Affecting Credit Being Granted
Another theme was that there were factors affecting credit being granted.
Rating on Transunion Credit Bureau and the ability to pay credit timeously are factors
that affect whether a consumer is granted credit or not. Consumers who qualify for
credit cards are able to access facilities that will make their lives more convenient…
(R1)
According to Knowler (2013), the following are key factors that affect whether credit is
granted or not:
a) Account payment history: whether accounts are well managed and
whether the entire installment is paid timeously.
b) Amount of debt: exactly how much is owed and how much of the credit
is actually getting used.
c) Negative information: information that the public can access, such as
judgments or bankruptcies that act as an indication of failure to repay
one‟s debt.
d) Credit history length: the period of time the accounts have been open.
According to McKinnon (2010), the largest portion of one‟s credit history is based on
one‟s credit score – that is about 35%. If a consumer‟s repayments are made
timeously, then the score should be good. Even so, a single late payment can have a
negative effect on one‟s score. Another factor that is considered is the length of the
credit history – a longer credit record is better than a shorter one. This means that the
consumer is able to handle credit and debt over a longer period of time and is
financially stable. This ability on the consumer‟s part works out to be 15% of the
consumer‟s credit score. The type of credit also impacts scores, with a weight of
about 10%; therefore, credit needs to be a combination of both installments and
57
revolving credit. Finally, the frequency that one applies for credit has an effect of 10%;
when a company performs a credit check, one‟s score is negatively affected.
4.2.5. Historical Factors Influencing Credit Industry
Historical factors emerged as a theme that had an effect on the credit industry.
Previously, pre 1994, there was not a black middle class due to apartheid. For
example there was “credit redlining”; if you were from a township you were denied
credit… (R3)
A few of the respondents stated that apartheid played a large role in the current state
of the credit industry. They elaborated by saying that, as a result of Africans having
restriction to the types of employment they could have, their income was also limited.
The expert on consumer law also felt that South Africans‟ past had an influence on
their credit potential. As a result, Africans rely on credit in order to be able to provide
their families with necessities.
A sub-theme that emerged was that of culture. South Africa is a country rich in culture
and heritage. It emerged that culture played a role in consumer attitude towards
credit. Culture is defined as “something that is shared by all or almost all members of
some social group. It is something that older members of the group try to pass on to
the younger members. Something (as in the case of morals, laws and customs) that
shapes behaviour, or …structures one‟s perception of the world.” (Adler, 1997,
pp.15).
Culture can affect people‟s attitudes, values and behaviour. Culture is enshrined in
people‟s everyday lives, including the values that the society lives by. Roos (1986)
views culture as a system in which people live their lives.
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According to Adler (1997, pp.15-16), whether it is values, culture, behaviour or
attitude, they all have an effect on one another. Values refer to factors – whether
explicit or implicit – that have an effect on the choices people make Values that a
person has can also be unconscious, not just conscious. It can be said that the
research found that values people have are based on people‟s culture and
upbringing.
The results indicated that respondents felt that African customers do not understand
the NCA. This is because they do not appear to understand the interest rates; to
African customers, interest rates are a new concept. Respondents were of the view
that Africans do not view the NCA as a mechanism to protect them from debt. They
view it as a system that forces them to pay back debt regardless of whether they can
afford it.
Respondents were however of the view that white customers in contrast appeared to
have access to information, and they understood the implications of getting credit;
hence, their interaction with credit was different. White customers, according to
respondents, appeared to be more cautious about making repayments timeously as
they understood the consequences of failure to do so.
Based on the responses, it appeared that the different cultures had a certain view or
understanding of the NCA. Certain cultural groups were identified as lacking in
knowledge or understanding of the NCA. For that reason, the NCA and its
implications could easily be misunderstood or not recognised. The research also
highlighted that the understanding or lack of understanding could have negative
consequences for some because those who are denied credit in terms of the NCA
could resort to loan sharks that offer credit at a higher cost but that do not check the
affordability of a person.
It emerged from the study that people view credit differently and one factor that can
make people view it differently is a person‟s attitude, therefore, certain cultures could
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lack the requisite understanding of credit and the implications when it comes to failure
to repay debt. The NCA seeks to afford all cultures with protection and education of
credit, especially because it affects consumers in one way or another.
4.2.6. Cycle of Poverty
Cycle of poverty emerged because consumers acquire credit not just to purchase
luxuries but to be able to afford necessities and as a result they get entangled in a
cycle of poverty.
As a person from a disadvantaged background I have found that there is a lot of
access to credit but at very high interest rates. We do not understand the terms and
conditions of the contracts we sign or the consequences… (R1)
Differences in patterns of spending, due to low and high incomes, were detected.
According to Mazibuko et al. (2010), lower income people tend to borrow from micro-
lenders as a way of supplementing lower income (as was also found in this research).
The borrowed money is utilised to obtain consumable goods. This results in month-to-
month borrowing, and as a result, consumers end up having difficulties to repay the
loans. The effect of such borrowing is a debt trap, where poor people borrow money
in order to have access to necessities such as food, education, electricity and rent.
The middleclass, on the other hand, borrow money to purchase houses, vehicles,
clothes, and other goods. One reason behind the borrowing is to purchase “luxuries”,
and as a result, it appears that South Africans do not have a culture of saving. This
point was stressed by Mboweni (2007) when he addressed the Monetary Policy
Committee Meeting. He stated that South Africans do not have a saving culture,
which is evident from the low savings rate, and people do not mind to borrow against
the income that they will only earn in the future.
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4.2.7. Effects of Credit Attitude on Consumers
An underlying theme that emerged from the interviews was that of a consumer‟s
attitude towards credit.
…consumers do not understand … the impact on consumer indebtedness, …all they
want is to access credit…(R3)
According to Chien and Devaney (2005), studies have shown that there has been a
dramatic increase in credit use in Americans from 1980 as a result of changes in their
attitudes towards credit. The change in attitude implies that consumers utilise their
credit to finance consumption. Kinsey and McAlister (1981) believe that having
knowledge of the risks and benefits of using credit may be the reason why people are
using more credit. The preference of a consumer is not always linked to his choice.
For example, although a consumer may want to borrow money, they may be declined
due to lower incomes or even as a result of over-indebtedness.
Attitude about credit is also related to demographic and economic factors; there is a
possibility that attitude intercedes the effects of economic and demographic factors
regarding credit use. For example, high-income earners could have a favourable
attitude about using credit because they do not have too much credit limitations as
they can repay their debt, unlike lower-income earners. Therefore, a consumer‟s
credit attitude can be affected by economic and demographic characteristics. If that is
the case, can attitude be considered a unique factor that affects the use of credit
when economic and demographic factors are removed?
The respondents in this study appeared to indicate that the attitude towards credit
affects the way people go about obtaining it. Woolworths‟ respondents stated that
lower-income groups were not worried about understanding the NCA, but rather, that
they needed the credit. They were also more susceptible to being blacklisted by the
credit bureau as a result of failure to repay their debt. The high-income groups were
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viewed as having access to knowledge of NCA. On that account, although they would
also access credit, they would be more cautious to repay their debt.
4.3. Theme 2 4.3.1. Consumer Protection
The theme of consumer protection was evident because it was clear to some of the
respondents that the NCA was enacted to protect all consumers.
NCA seeks to protect consumers from unscrupulous lenders, the cost of finance etc.,
but due to people’s personal circumstances, people who are desperate for credit will
do anything to get a hold of some cash to provide food for their families…(R4)
One of the main purposes of the NCA is to provide protection to consumers. The
Government Gazette (2006), states that the goal of the NCA is to provide protection
and prevent consumers from being taken advantage of through over-indebtedness
and reckless lending.
The NCA can be seen as having seven goals that benefit consumers. These are
protection from exploitation and reckless lending; disclosure as to the cost of finance;
limitation as to the amount of interest that can be charged; education of consumers
about their rights; remedies for consumers; regulation of the credit environment by
making contracts unenforceable if lenders have failed to register with the NCR.
The expert on consumer law believes that there is a general perception from credit
providers and consumers that the NCA works. He gave the example of debt
counseling, which was not there in the previous credit legislation. Debt counseling
helps consumers who are indebted, as arrangements can be made regarding
repayment of debts. Once the debt is repaid, a person can be reabsorbed back into
the credit market.
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According to a Woolworths employee that was interviewed:
…NCA fails to provide consumers with sufficient protection;… because how can
people feel the protection of an Act they do not understand?(R3)
Another respondent made the following comment regarding protection of the NCA:
…On the terms and conditions of credit, there is not a proper explanation so people
are still not exposed and lack understanding. NCA fails to protect people because
how can it protect them if they do not even know it…(R2)
Another respondent believes that the NCA provides protection to consumers. He
gave examples of sections of the NCA that provide protection such as section 86 on
debt counselling, regulation of credit providers by the NCA, registration of credit
bureau, and registration of debt counsellors.
He noted that:
…The current amendments wish to increase protection to consumers through
implementation of affordability assessment guidelines. Credit providers will have to
comply with guidelines before they are granted credit… (R3)
He went on to further state:
…The current amendment (to NCA) is trying to increase the power of the National
Credit Regulator in terms of deregistration of credit providers that are not compliant
with the NCA. Adverse credit listing rules (section 70(2)) prior to blacklisting credit
providers will have to comply with these rules… (R3)
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4.3.2. The Impact of the NCA on Consumer Indebtedness
The theme of whether there was an impact on consumer indebtedness or not
emerged especially because the Act seeks to balance the unequal power between
the credit provider and the consumer.
Consumers do not understand the impact and think it is too strict because they are
given less credit due to existing credit… (R2)
The respondents appeared divided as to whether the NCA can have an impact on
consumer indebtedness. A respondent made the point that consumers were focused
on having a better lifestyle. As a result, they continued to take out credit, especially as
the economy grows and people earn more and more; thus, consumers get stuck in a
cycle of indebtedness regardless of the NCA.
However, another respondent made mention of the fact that:
…Credit providers understand that extension of credit is a mandate of the
government; however, they are aware that there should not be reckless lending
because that will cripple the economy… (R3)
It may still be too early to ascertain what the impact of the NCA is. It is a reality that,
due to it being harder and harder to get credit, consumers may still turn to lenders
that are not registered, i.e. those who could charge exorbitant interest and cause
them to be stuck in debt. The respondents seemed to hold the view that lower-income
groups lacked understanding of the NCA and the way it impacted them;
subsequently, it was not likely that there would be any changes regarding the way
they acted towards credit or viewed the NCA. It appears that consumers will continue
to seek credit when they need it, perhaps to supplement income or if there is an
emergency. The respondents acknowledge that consumers with lower incomes were
most likely not to save for long-term for things such as houses and retirement The
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belief is that consumers who are informed create efficient and competitive markets
because, when consumers have knowledge, they can make choices that satisfy their
goals.
4.3.3. Measures in the NCA That Will Impact on Consumer Spending and Consumer Debt Burden
What became evident from respondents was that consumers lacked knowledge and
understanding about credit and the cost of credit. A way of providing protection to
consumers, was to ensure that prior to consumers entering into a contract, that
consumers should have access to information that will allow them to make informed
decisions.
It is crucial for consumers to have an understanding of the NCA for the language in
the credit agreement must be in simple language... (R7)
Consumer credit legislation seeks to address the imbalance between credit providers
and consumers by making it compulsory for credit providers to disclose a consumer‟s
obligation. The NCA seeks to achieve its purpose by placing the onus on credit
providers to amend the business model and their credit agreement.
The NCA sets out consumers‟ rights to get information that is in an understandable or
plain language. Although other laws such as the Financial Advisory and Intermediary
Services Act (2002) have also placed the requirement that information must be in
plain language, the NCA pioneers this by defining plain language. Section 64 of the
NCA states:
“(1) The producer of a document that is required to be delivered to a consumer in
terms of this Act must provide that document-
(a) in the prescribed form, if any, for that document; or
(b) in plain language, if no form has been prescribed for that document.
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(2) For the purposes of this Act, a document is in plain language if it is reasonable to
conclude that an ordinary consumer of the class of persons for whom the document is
intended, with average literacy skills and minimal credit experience, could be
expected to understand the content, significance, and import of the document without
undue effort, having regard to-
(a) the context, comprehensiveness and consistency of the document;
(b) the organisation, form and style of the document;
(c) the vocabulary, usage and sentence structure of the text; and
(d) the use of any illustrations, examples, headings, or other aids to reading and
understanding.” (Section 64, p.95).
According to Burt who cited Frances Gordon, co-founder of plain language training
and consultancy company, plain language is not just about the words, but also, a new
borrower needs to be able to understand the purpose of a document (Burt, 2007).
The definition of plain language also makes note of comprehensiveness. The
borrower needs to be given information that will allow him to make an informed
decision regarding initiation fees, interest, principal debt, and other relevant matters.
Gordon believes that to be in accordance with the definition, businesses may have to
do user testing. Section 81 of the NCA has a requirement for credit providers to
assess whether the borrower understands the risks and costs and their rights and
obligations in the contract (Burt, 2007).
4.3.4. Credit Marketing and Advertising
Credit marketing and advertising emerged as a theme as it plays a role in consumers
seeking credit and providing clarity on any grey areas about credit.
Advertising is a great medium that can assist credit providers understand how
beneficial the NCA really is. Advertising can provide consumers with answers to their
questions and clarity… (R7)
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The NCA does protect consumers from undesirable advertising practices. This is a
magnificent achievement because there are many dangers that advertising can be
used to have people getting into debt.):
“The stringent restrictions on advertising…were designed to prevent intending
borrowers from being gulled into burdensome loan contracts by attractive advertising
offering easy terms. Many necessitous individuals were thereby induced to take loans
without any appreciation of heavy, if not penal, default provisions contacted in the
contract …” (Kelly-Louw, 2008, pp.211).
The NCA‟s negative option marketing and opting out concepts were introduced for the
first time in consumer credit law. Credit providers can no longer induce consumers
into a contract by stating that the contract is concluded if the consumer fails to
communicate that they are declining the offer (Section 74).Any agreement concluded
in terms of negative option marketing shall be deemed unlawful and void. The opting
out clause provides that consumers must be given the opportunity to choose options
such as opting out of the agreement (Section 74(4)).
Section 75 of the NCA affords consumers protection from marketing and sales, such
as advertising. According to Regulation 21(6), to adequately control credit advertising,
there must be enforcement. The NCA fails to provide measures from non-compliance.
A remedy available to consumers is to lodge a complaint with the NCR.
4.3.5. Pre-Agreement Disclosure
Pre- Agreement disclosure emerged as a theme because the ability to have access to
information before signing the agreement gives consumers a chance to make an
informed decision.
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… a pre-agreement statement is given to consumers who are seeking credit.
Woolworths even goes as far as discussing the terms of the credit agreement
telephonically prior to credit being granted … (R2)
The NCA makes it a requirement that credit providers give a consumer a pre-
agreement statement along with a quotation in which all the financial information is
enclosed, for example, the deposit, credit given to the consumer, and installments
that are payable. The quotation binds the credit provider for five business days after
the date the quotation was given to the consumer.
It became apparent from the Woolworths respondents that despite the benefits of the
NCA there were still some consumers who failed to see the NCA as a meaningful Act.
For example, consumers‟ understanding of the NCA impacts on their finances and
there are consequences if they do not adhere to it. By increasing financial education,
the effect is an increase in the complexity of financial instruments and products and a
strain on consumers‟ financial security. Also, consumers who are educated can make
the best decisions for themselves. These consumers would attend to checking credit
agreements and, as a result, reduce the power of credit providers from the credit
market.
4.4. Theme 3
4.4.1. Expenses for Lower-Income Earners
It became evident that many lower-income earners had taken out credit of some sort
and as a result of lack of knowledge of cost of credit found themselves unable to
repay their debt.
… many low-income earners are over-indebted due to lack of sufficient knowledge
about credit and the consequences of failure to repay debt … (R7)
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Based on Hurwitz and Luiz‟s report in 2007 that researched South Africa‟s working
class indebtedness, 60% were over-indebted with the National Loan Register (NLR)
or Consumer Credit Account (CCA). The other 40% of the sample reported that the
debt was in the acceptable range.
Reason to borrow
The study highlighted various reasons as to why people take out credit.
…low-income earners are willing to default on their clothing accounts because they
know that we will not repossess their clothing … (R2)
The main reasons consumers sought credit was dependent on numerous factors
namely: convenience, indication of prestige, sense and security, economy and
shipping abroad (Meidan & Davos, 1994).
4.4.2. Over-indebtedness
Over-indebtedness became an obvious theme because the Act sought to protect
consumers from being over-indebted and unable to repay their debt.
The NCA acts as a control measure from credit providers granting credit consumers
cannot afford… (R5)
The dti and NCR brochure „Take control of your finances’, which is a consumer‟s
guide to managing debt, advises consumers on how to protect themselves from over-
indebtedness, repossessions, and lists the following as signs of over-indebtedness:
a) borrowing money to pay debts
b) failure to pay bills regularly
c) receiving letters of creditors requesting payment
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d) judgments against you
According to Business Day (2007), it was recorded that, in 2003, there was 15% of
the population that received 72% of credit. Credit usage was found to be the reason
that low-income earners were getting over-indebted, with there being an annual
increase of about 54% of bad debt judgments.
The Woolworths employees who were interviewed took the time to explain and
educate consumers who found the NCA too restrictive with its affordability checks and
credit history requirements. It also transpired that, even with education, people from
certain cultures did not change their views.
4.5. Theme 4 4.5.1. Bias against Race to Allocate Credit
The theme of bias as to how credit was granted emerged.
Previously, pre 1994, there was not a black middle class due to apartheid. For
example there was “credit redlining”, if you were from a township you were denied
credit… (R3)
Respondents indicated that the credit bureau needs to facilitate information being
spread about consumers. The implication is there will be transparency about
information that can be utilised for client selection and, as a result, decreasing
discrimination in credit decisions. Credit bureau information that is credible can also
be a foundation for statistical analysis to be able to ascertain whether there is any
potential racial bias in the client selection by any credit provider. The credit bureau
could, therefore, play a key role to support a financial market that is efficient and fair
credit allocation. However, currently the credit bureau is viewed as fostering
inequalities and discrimination instead of making the situation better (dti, 2007).
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The consumer credit legislation seeks to regulate credit information by seeking to
ensure that information held by the credit bureau is accurate, and consumers have
the opportunity to rectify incorrect information or get it removed. The Department of
Justice, with the Law Commission, has begun the process of drafting a new piece of
legislation, which also deals with regulating credit information and the credit bureau.
4.6. Conclusion
Analysis of the data from the interviews resulted in numerous themes surfacing.
Culture emerged, and it became clear that different cultures view credit differently. It
became clear that due to the inequalities of the previous government, certain groups
were denied credit and access to information. Still, the interesting thing is that, with
the new system, cultures were gaining exposure. Cycle of poverty also emerged as a
theme that people borrow in order to supply their family with necessities, and as a
result, they find themselves tangled in a web of borrowing and paying debt.
Consumer understanding was another theme; it appears that there is a general
feeling that understanding of the NCA is low. Another theme was consumer
awareness and knowledge; it appears that a greater effort to increase awareness is
needed. The theme of consumer protection also appeared; the NCA seeks to protect
consumers, and measures taken to protect consumer were mentioned. Consumer
history and factors that affected credit being granted also become relevant regarding
consumers seeking credit.
The next chapter presents the conclusion and recommendations of the study.
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CHAPTER FIVE – CONCLUSION AND RECOMMENDATIONS
5.1. Introduction
According to former President Thabo Mbeki (2003), South Africa is divided into two
economies. The first is modern, developed, wealthy and integrated to the global
economy, whilst the second economy is undeveloped and poor. It is not easy to
escape poverty in the second economy. Credit plays a vital role to an economy
because, by obtaining credit, consumers are able to purchase houses, cars, furniture
and clothes, and other items, which, in turn, boosts the economy because of the jobs
created by supply and demand.
Hirsch (2004) makes an interesting point that, once a society is divided as a result of
the inequalities within that society, it becomes difficult to correct those imbalances
without government intervention, hence the enactment of the NCA in 2005, which
dealt away with the previous credit legislation that failed to provide consumers with
adequate protection. The purpose of the NCA was to protect consumers from the
unequal bargaining power of credit providers, and to prevent reckless lending and
over-indebtedness.
The aim of this study was to ascertain whether the NCA is able to fulfill its purpose;
that being the case, the researcher sought to understand the perceptions of the NCA.
The study made it clear that there was a need for the NCA in South Africa. South
Africa is a country with two economies and as a result government intervention is
necessary to try to reach a medium. Credit plays an important role in the economy
because the more people can buy, the greater the demand as a result the need for a
greater supply of goods and services, but it is also important that consumers are able
and willing to repay their credit.
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According to Jones and Schoeman (2006) the NCA codifies the basic rights of
consumers regarding credit. Previously, the complexity of credit agreements meant
that individuals were at the receiving end of unequal bargaining tools of contracts they
had concluded. A large number of the South African population is made up of low-
income earners who could only access microfinance as a result of not being able to
access credit. Consequently, many consumers are left indebted and unable to repay
their debts.
The NCA seeks to impose regulation on credit providers to ensure that credit granted
to consumers does not leave the consumer over-indebted or unable to repay the
debt. During the process of granting consumers credit, the credit grantor has to
comply with the regulations of the NCA.
The NCA stipulates mandatory steps that credit providers must adhere to which, have
the effect of protecting consumers. The process is as follows:
In the first phase, the applicant must be evaluated to establish whether they are
creditworthy, and there must be an analysis of the risk the credit grantor assumes by
lending to the consumer. All the relevant information must be captured, such as
employment, credit history, and financial information.
The second phase is to attend to a credit appraisal. In this phase, there is scrutiny of
information from the three-month bank statement and information about the credit
history of the consumer from the credit bureau. The eligibility of the consumer, and
terms and conditions are then given to the consumer in the form of an offer. This is
important because the credit grantor has to make decisions which may affect the
consumer‟s ability to repay their debt. At this stage, many sections of the NCA apply,
which seek to protect consumers such as a requirement that consumers are given
information, which seek to provide prevention of reckless lending through an
assessment that considers the following, namely:
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a) understanding of the cost and risk of credit
b) obligations and rights
c) consumer‟s debt repayment history
d) current financial status (Section 81(2)(b) of the NCA)
The third phase is when the credit applicant credit is granted, the consumer must be
given a clear statement of the cost of credit and then the funds they requested
(subject to their affordability) if he/she succeeded in passing the requirements for
obtaining credit from the credit grantor. The funds are usually deposited directly into
their account.
The study focused on the evolution of the NCA and examined the previous legislation
on credit, namely Credit Agreements Act (1980) and the Usury Act (1968) and exactly
where the legislation was failing to serve consumers. The role of credit in the
economy and the impact of the NCA was considered. In order to gather data, a
qualitative approach was taken because it creates the stage for open, descriptive
interaction (Dunn, 2010). Semi-structured interviews were considered the best way to
extract information from the respondents. Semi-structured interviews create a forum
where questions are posed to the respondents, and they can respond by including
their feelings or personal experiences. Respondents were encouraged to include any
extra information they felt would add value to the research (Dunn, 2010). In-depth,
face-to-face interviews were conducted with eight respondents. The data was
analysed using thematic analysis by considering all the data from the interviews and
finding similarities or differences in the responses (Miles & Huberman, 1994).
The penultimate chapter presented a discussion on the research findings. The final
chapter answers the research questions that were set and outlines implications of the
study and makes recommendations for future studies.
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5.2. Research Questions
The research aimed:
a) To determine whether consumers view the NCA as beneficial.
b) To establish whether consumers understand the purpose of the NCA.
c) To determine whether credit providers view the NCA as beneficial.
d) To determine whether the NCA effectively prevents unfair credit
practices.
5.3. Key Findings
After analysing the responses from the interviews, the following conclusions were
reached.
5.3.1. Whether Consumers view NCA as beneficial
The study found that consumers appeared to be divided about whether or not the
NCA was beneficial.
A theme that emerged from the respondents was that of a cycle of poverty. It became
clear that lower-income groups sought credit for different reasons to the middle-
income groups. The lower-income groups required credit to purchase consumables
that were actually necessities in their daily lives, such as food, electricity, and water.
They would then have to borrow on a monthly basis in order to sustain their families.
On the other hand, respondents who are from the middle-income group would require
credit in order to maintain a certain lifestyle by purchasing things such as cars, homes
and furniture, and other similar things. Lower-income groups did not have
understanding or interest in the cost of credit and the implications regarding their
ability to repay because they needed the cash.
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Consumer‟s perception of the NCA, what they know about the NCA and the impact it
could have on people‟s lives was considered in a survey by Blue Financial Services
(2007). It was evident from the study that consumers‟ awareness was low, and
understanding was also not very good, with almost half of the respondents being
unable to relate to NCA and any impact it could have on their lives. In order to
mitigate the consequences of consumer‟s lack of understanding on NCA, the NCA
shifts the burden on the credit provider, who must disclose the cost of credit. The
effect for consumers is increasing consumer awareness by giving consumers access
to information in order to compare the various credit options that are in the market. A
low consumer awareness of the NCA can result in consumers opting for credit that is
convenient instead of choosing the most economical option. Braunsberger et al.
(2004) state that the APR that appears in credit card applications was found to have a
negative effect because consumers were distracted and, as a result did not focus on
the cost of credit (Blue Financial Services, 2011).
A consumer‟s credit history is another area that was misunderstood by consumers
and highlighted in the research. A requirement before receiving credit in terms of the
NCA is to obtain information from the credit bureau about a person‟s credit history.
The credit bureau has the responsibility of linking the consumer‟s details such as
name, identity number, address, and other personal details to the credit application
using the credit bureau files (Williams, 2009).
A consumer‟s credit history is used by retail agents and banks to ascertain the
creditworthiness of an individual. The willingness and ability to repay debt timeously is
considered by considering past repayments, the emphasis being on whether a
consumer pays obligations regularly (Traub & Ruetschlin, 2012).
It became apparent from the interviews that there were consumers who lacked an
understanding of the NCA and, as a result, viewed the NCA as not being of benefit to
them because they would be denied credit due to the their credit history. Knowler
(2013) made an interesting point that credit history is important, especially when
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considering that consumers should be able to access information this is essential, for
example, if the consumer needs reasons as to why their credit application was
denied. The NCA makes provision for consumers to be given the right to be furnished
reasons about why their application was denied.
Consumers may not be aware that, when considering whether to grant credit or not,
there are factors that must be considered, namely, a consumer‟s credit history, debt
that is owed by the consumer, information that can have a negative effect on the
consumer‟s credit history such as judgments or bankruptcies, and the amount of time
a person has had a credit history. According to McKinnon (2010), a consumer‟s credit
history is based on a credit score. A single late payment can have an adverse effect
on the credit score. Another factor that is considered is how long a credit history is – a
longer credit history depicts whether consumers are able to handle debt over a long
period and are financially stable. The credit type also has an impact on the score;
therefore, there needs to be a combination of revolving and installment credit.
5.3.2. Whether Consumers Understand the Purpose of the NCA
The study made the finding that, generally, there was a perception that consumers
lack understanding of the purpose of NCA, although there are consumers from the
high-income bracket who have access to information and understand the NCA. The
point was raised that understanding of the NCA was linked to a person‟s literacy. It
was indicated that people with a higher level of literacy had access to information
and, as result, understood the NCA, its intention and purpose. Whilst the lower
literacy person does not have the required information at his disposal, consequently,
when he applies for a loan and gets turned down or approved a lower amount, he
fails to understand because all he wants is cash.
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According to Brobeck (2007), in a consumer survey by the Consumer Federation of
America (CFA), it was discovered that consumers do not have the required
knowledge about credit.
According to one respondent, a factor that contributes to lack of consumer knowledge
and education of their legal rights to facilitate regulation of the informal market is level
of income. The higher-income earners have a better understanding of the NCR than
lower-income earners, and this can be attributed to the lack of capacity within the
NCR. That being said, intervention is required to prevent the lending market from
being segregated.
5.3.3. Whether Credit Providers View the NCA as Beneficial
The respondents highlighted that the NCA was enacted because from 1994 until early
2000s, there were many South Africans who were excluded from the formal credit
system and that they would resort to microlenders who offered quick money without
asking too many questions or having many requirements. The effect of such lending
was that many consumers were left unable to repay their debts and would be left with
a situation where they were over-indebted. The government realised that they had to
intervene to correct the situation because the situation would not have corrected
itself.
It can be deduced from the NCA that it is beneficial because it was enacted to protect
consumers from reckless lending. That being so, it places the burden on credit
providers to first satisfy themselves that a consumer is able to afford credit prior to
credit being granted. Failure on the part of the credit provider to ensure that the
consumer is not over-indebted can have adverse consequences on the credit
provider, such as the credit agreement being rendered null and void by the court.
It was found that the NCA was beneficial for consumers; it provides relief to
consumers in the form of section 86 debt counseling, which allows the consumers an
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opportunity to get counselling about what they can afford to repay the credit provider
and make arrangements accordingly. The NCA also seeks to be beneficial by
regulating credit providers, credit bureau and debt counsellors by placing a
requirement that they must be registered; this requirement seeks to regulate their
actions regarding credit.
The overall view or perception was that the NCA was beneficial to credit providers
because it forces the credit providers to first analyse the credit record and current
financials of the consumer, and assess whether the consumer can afford to repay the
credit. Although the NCA imposes stricter measures, and as a result less people
could be eligible to obtain the credit, it seeks to also protect the credit providers from
debtors who default in their payments.
As a result of credit providers being forced to educate their staff about the NCA so
that they can comply with the provisions, credit providers themselves are better
educated about the benefits of the NCA and the implications of compliance and non-
compliance to the NCA.
5.3.4. Whether the NCA Effectively Prevents Unfair Credit Practices
This study found that the NCA sets out goals that it seeks to achieve, namely,
disclosing the cost to finance, preventing reckless lending and over-indebtedness,
education for consumers, limiting the interest rate that can be charged, and providing
a remedy to a consumer who has been aggrieved by a credit provider.
According to Goodwin-Groen (2006), the NCA has seven goals that it seeks to
achieve. A few of these are disclosing the cost of finance, reckless lending,
restrictions as to charges on interest rate, consumers to be educated about their
rights, remedies afforded to consumers, and regulating the credit industry as to who
must register with the NCR.
79
It was found further that the NCA imposes regulations on credit providers such as that
the credit providers must be registered in order to provide consumers with credit. The
requirement that there must not be reckless lending is a protective measure that
creates the requirement on credit providers to do an assessment of the consumer‟s
credit worthiness. There is also section 129(1)(a) of the NCA that mandates that prior
to a summons being sent to a debtor, there must be a letter of demand that serves as
a notice to the debtor of his/her right to consult with a debt counsellor. The section
seeks to resolve disputes to the agreement or create a plan that will enable the debtor
to bring their payments up to date.
The study then highlighted that the NCA also imposes consequences on credit
providers who advance reckless lending to consumers. In the event that it is
discovered that the credit grantor provided credit to a consumer who is over-indebted,
the agreement concluded can be made null and void.
The views from the respondents indicated mixed feelings about the NCA. One
respondent raised the point that the NCA cannot protect someone who does not
understand it. On the other hand, another respondent made mention of all the
sections in the NCA that were created to protect consumers. He highlighted section
86 in the NCA that dealt with debt counselling and that credit providers must comply
with. He also noted that there were amendments being done to the NCA to address
the issue of protection of consumers‟ rights. The amendments would introduce
guidelines to credit providers that would have to be satisfied prior to credit being
granted.
The study found that the NCA also seeks to create a measure by which the NCA can
have an effect on how consumers spend. Below are some examples of the measures.
Crowther (1993), states that as a measure of protection to consumers, the NCA
makes it compulsory for credit providers to disclose information to the consumer, prior
to the contract being concluded. The NCA seeks to protect consumer rights by
80
requiring the language in a contract to be in plain language in accordance with
section 64. The NCA placed a requirement for the language to be in plain language
because it seeks to create a state where consumers are aware of the choices they
make regarding initiation fees, principal debt, interest, and other matters. Section 81
places the onus on credit providers to make an assessment about whether the
consumer understands all the costs, risks and rights in a contract (Daily Industry
News, 2008).
The NCA seeks to provide protection to consumers from advertising that is
undesirable. Negative option marketing is prohibited, and a contract resulting from
negative option marketing is void in terms of the NCA (Section 74).
One of the reasons for the need to regulate credit was that consumers lacked
knowledge about the credit agreements they engaged in, and as a result, they were
getting into contracts that only protected the interests of the credit provider, which
would eventually lead to consumers being over-indebted. For that reason, a pre-
agreement disclosure being included in the NCA is crucial because it provides
consumers with power. Consumers are now given access to information prior to
finalising the contract. Consumers are given a quotation of the credit agreement,
where they are able to see the initiation fee, the interest, period of repayment, and
other relevant information. Consumers are then given five days in which they can
decide to cancel the agreement.
It appears that the dti is in the process of amending the NCA. An inclusion will be
made that seeks to extend the protection of consumers. The credit provider is given
the onus to conduct assessment guidelines. The consumer must satisfy the
guidelines prior to being able to get credit. This will be a great protection because it
forces credit providers to really assess all the information at their disposal.
81
5.4. Recommendations
5.4.1 Awareness or training of staff to explain the NCA
It was evident from the study that not enough people have the requisite education
about the NCA; because of this, the Regulator should consider outsourcing a service
provider that will be tasked with education and training. Education on the credit
industry is crucial because consumer spending has an impact on the economy, and
ignorance can result in consumers being left vulnerable. Education is invaluable
because lower-income households seek credit because of necessity or for middle-
income households, to maintain their lifestyle (O‟Loughin & Szmigin, 2006).
Credit providers claim that there are programmes about the NCA that can assist with
the education of consumers and staff; however, these fail to increase consumers‟
awareness. Consumers still lack the proper understanding of the impact of their
financial choices and the consequences of failure to adhere to the conditions of the
NCA. Prior to granting credit, consumers should be given at least five minutes to read
over the terms of the credit agreement and be given a chance to clarify any
confusion. The most important terms to the agreement should be highlighted, such as
the initiation fee, the interest, the period of the loan, and the total cost of the loan.
According to Hilgerth and Hogarth (2003), consumers who are well educated and
have access to information are able to make better choices about their finances. It will
be these consumers who are able to check their credit transactions and avoid
unscrupulous credit providers.
5.4.2 Suggested amendments to the Regulations
Section 105(2) of the NCA states factors that the Minister must consider regarding
prescribing limits on how much credit should cost, read with Regulation 45(2), which
stipulates the factors that the NCR should consider when recommendations are made
82
to the Minister regarding how much credit should cost. There needs to be a balance
of the competing interests between a consumer‟s need for credit that is cheap and a
credit provider‟s need that is economically viable for moneylenders.
In order to deal with the above, the following should be considered:
a) There should be a limitation as to the initiation fee that can be charged
by the credit provider. The initiation fee should also be no more than 5%
of the borrowed amount but should never exceed the maximum of
R5 000.
b) There should not be a monthly service fee placed on short-term loans.
Alternately, there needs to be a limit placed on the maximum service
fee, that is a maximum of 1% of the loan amount.
c) The interest rate on short-term loans should have a maximum of 10%.
d) There should be awareness of the impact of over-indebted consumers.
It becomes evident from the study that there is a need to increase awareness about
the impact of over-indebtedness and the consequences of failure to repay debt. It was
reported in a recent study by the NCR stats that consumers lacked sufficient
protection about unsecured lending (National Credit Regulator, 2012). Failure of
consumers to repay their debt could also have a crippling effect on the credit-
providing industry; consequently, increasing awareness will protect consumers and
credit providers.
5.4.3 Intervention programmes
The study revealed that due to over-indebtedness, there would a need for intervention
programmes that could be in the form of free voluntary debt mediation that is offered
by the National Debt Mediation Association (NDMA). The NDMA would be able to
assist the NCR to address complaints against credit regulators, provide for debt
83
arrangements and assist with education of consumers about credit (NDMA Annual
Report, 2011).
5.4.4 Proper or responsible advertising
The study found that advertising played a role in consumers seeking credit; as a
result, advertising would have to be limited to proper or responsible advertising.
According to La Ferrara, Chong and Duryea (2008), mass media can have an effect
on behaviour. In an example of Brazil‟s RedeGlobo network that provided education
on contraception, there was a decrease in women having children in the 1970s.
Nonetheless, advertising alone does not increase awareness; it was noted that a
soap opera was able to decrease infant mortality in Egypt by 70% by increasing
awareness of Oral Rehydration Therapy (Abdulla, 2004).
5.4.5 Transparency about credit approval
The study highlighted the need for greater education of consumers, especially
amongst consumers from a low-income bracket. The researcher believes that in order
for credit providers to comply with the plain language requirements of the NCA,
companies must:
• use plain, colloquial language
• use short sentences
• write with the ordinary consumer in mind
Greater transparency about the credit approval process would be beneficial to
consumers, as it would increase credit providers‟ protection; and increase
transparency and efficiency of financial markets, and result in the reduction of
systemic risk (Financial Services Board, 2011). Transparency would also assist
consumers to understand NCA.
84
5.5. Recommendations for Further Research
Qualitative research places emphasis on themes and ideas instead of testing a
hypothesis. As a result, this type of research does not give data that is conclusive, but
instead, it acts as a guideline on future research that can be conducted (Hussey &
Hussey, 1997).
This study was limited to certain respondents and had a specific focus. Future
research could focus on the following:
A quantitative study can be conducted as a follow up from this study over a
longer time period to determine consumers and credit providers‟ understanding
and impact of the NCA.
Respondents in this research were Woolworths employees and a manager,
and an employee of the dti who deals with consumers, competition law and
policy. It would be interesting to determine the perspective that other retailers
have about the NCA. Further research needs to be conducted with other
industry players, such as banks. The introduction of the NCA was during a
period where interest rates were high in 2006; hence, a decrease in consumer
spending cannot be solely a result of the NCA. The NCA should also be
measured during the easing phase of the monetary policy.
5.6. Conclusion
The study sought to determine perceptions of the NCA. The study found that
consumers and credit providers were divided as to whether the NCA was beneficial
and whether consumers understood the purpose of the NCA. Credit providers view
the NCA as beneficial because it created a process of first checking a consumer‟s
credit history and indebtedness in order to establish whether they could afford to
repay the credit prior to the credit being granted. Consumers, on the other hand, had
85
mixed views; the higher-income earners who have access to information about the
NCA understood that the NCA was created to protect them, whilst lower-income
earners who lacked access to information viewed the NCA as creating measures that
made it difficult to obtain credit.
It was highlighted in the study that, as a result of South Africa‟s past, the economy
was divided into two: the wealthy and the poor (ASGISA, 2006). Government
intervened with the introduction of the NCA that sought to regulate the credit industry,
as consumers purchasing goods on credit had an impact on the economy. The NCA
outlawed many unfair lending practices in order to prevent reckless lending that would
result in consumers being over-indebted and unable to repay their debt. The problem
is that low-income consumers that were meant to benefit from the NCA are still a step
behind.
According to Ramsey (2000), consumer protection can impact positively on consumer
protection. He makes an interesting point that low-income earners suffer a higher
consumer detriment than middle-income earners because this accounts for a greater
percentage of their income. He cites Goode who makes a thought-provoking point
that consumer credit legislation is truthfully not equipped or designed to address the
needs of low-income earners.
The study also considered that the NCA sought to protect consumers from unfair
practices in order for the NCA to effectively bring about changes to the credit market.
The Regulator is tasked with increasing consumer education and awareness; in this
regard, it a vital requirement that credit providers comply with this endeavour. The
study found that there were low levels of awareness mainly amongst low-income
earners. Ignorance of the NCA can result in consumers succumbing to economic
shocks, as it appears that the choice to get credit is part of the consumer culture
along with the need to maintain a particular lifestyle (O‟Loughin & Szmigin, 2006).
86
Finally, the study found that the NCA appears to be observed as positive by
consumers who have knowledge of it and its intentions. The NCA protects consumers
from credit providers‟ unequal bargaining power. As a result of the prejudices caused
by apartheid, many low-income South Africans lack knowledge of credit and the
consequences of credit. A consumer who decides to obtain credit should have
exposure to a credit market that is competitive, transparent, fair and equally priced.
Consumers should have a full understanding of their rights and obligations when
opting for credit. Consumers need to be comfortable with the NCA and what it is
trying to do as well as the consequences on their finances.
87
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reports/ar2008/ops_review/financial.asp, accessed on 25 May 2013.
98
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0FebQ%2007%20Final.pdf, accessed on 13 June 2013.
http://www.ncr.org.za/publications/Credit_Monitor/Dec13/CBM%20December%20201
3.pdf, accessed on 25 May 2013.
http://www.finscope.co.za/finscope/pages/Initiatives/Countries/South-
Africa.aspx?randomID=429e4810-d7aa-4f1a-804b-
2669907a346f&linkPath=3_1&lID=3_1_11, accessed on 28 April 2013.
http://www.resbank.co.za/Lists/News%20and%20Publications/Attachments/4066/Full
%20Quarterly%20Bulletin.pdf, accessed on 25 May 2013.
http://www.woolworths.co.za/store/fragments/corporate/corporate-
index.jsp?content=../article/article&contentId=cmp100967, accessed on 28 April
2013.
http://www.businessdictionary.com/definition/consumer.html, accessed on 08 January
2013.
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January 2013.
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January 2013.
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1.9.42096/The%20Microcredit%20Sector%20in%20South%20Africa_An%20Overvie
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99
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.pdf, accessed on 14 January 2013.
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%20Act%20-%20Thinus%20Nortje.pdf, accessed on 29 January 2013.
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100
Appendix 1: Interview Questions
Could you please provide a brief background of your experience in/with the credit
industry?
Do you think that consumers understand the purpose/benefit of the National Credit
Act? Explain the reason for your answer.
What are the broad categories of factors influencing credit being granted to a
consumer?
Do you think consumers and/or credit providers view the National Credit Act as
beneficial?
Are there factors influencing the credit industry unique to South Africa?
What factors will only be experienced in South Africa?
Do you think consumers and/or credit providers understand the National Credit
Act and its impact?
Do you think the National Credit Act provides sufficient protection for consumers?
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Appendix 2: Informed Consent Form
UNIVERSITY OF KWAZULU-NATAL GRADUATE SCHOOL OF BUSINESS AND LEADERSHIP
MBA Research Project
Researcher: Phola Ngubane (0822972225) Supervisor: Cecile Gerwel Proches (0312608318)
Research Office: Ms P Ximba (0312603587)
Dear Respondent,
I, Phola Ngubane, am a Master‟s in Business Administration student, at the Graduate
School of Business and Leadership, of the University of KwaZulu-Natal. You are
invited to participate in a research project entitled: Perceptions of the National Credit
Act: A Case Study of Woolworths Hillcrest. The aim of this study is to look into how
the NCA is viewed.
Through your participation, I hope to understand the extent to which the legislature‟s
intention is understood and implemented by those affected by the NCA. The results of
the interviews are intended to contribute to the study of effectiveness of the NCA to
prevent unfair credit practice.
Your participation in this project is voluntary. You may refuse to participate or
withdraw from the project at any time with no negative consequence. There will be no
monetary gain from participating in this survey. Confidentiality and anonymity of
records identifying you as a participant will be maintained by the Graduate School of
Business and Leadership, UKZN.
102
If you have any questions or concerns about completing the interview or about
participating in this study, you may contact me or my supervisor at the numbers listed
above.
The interview should take about 45 minutes. I hope you will take the time to
participate in the interview.
Sincerely
Investigator‟s signature______________________Date_________________
This page is to be retained by the participant
103
UNIVERSITY OF KWAZULU-NATAL
GRADUATE SCHOOL OF BUSINESS AND LEADERSHIP
MBA Research Project Researcher: Phola Ngubane (0822972225)
Supervisor: Cecile Gerwel Proches (0312608318) Research Office: Ms P Ximba (0312603587)
CONSENT
I…………………………………………………………………………(full names of
participant) hereby confirm that I understand the contents of this document and the
nature of the research project, and I consent to participating in the research project.
I understand that I am at liberty to withdraw from the project at any time, should I so
desire.
……………………………………. ………………………………
SIGNATURE OF PARTICIPANT DATE
This page is to be retained by the researcher
104
Appendix 3: Ethical Clearance Approval
